Federal Judiciary

But there is a larger story to be derived from this story, and specifically from the case against Waters, that illustrates how such morbid racialism corrupts politics and politicians. Waters is charged with improperly using her position to benefit OneUnited, a minority-owned bank in which her husband had made substantial investments. OneUnited's balance sheet was badly damaged when the government took over Fannie Mae and Freddie Mac and those companies' stock prices crashed.

#ad#Waters intervened to secure for OneUnited a meeting with the Treasury Department officials in charge of deciding which banks would get capital injections from the $700 billion Troubled Asset Relief Program, and OneUnited subsequently received a $12 million allocation. To the extent that Waters's intervention was the key to OneUnited's receiving the money, and that the money was the key to the health of Waters's husband's investment, Waters likely violated a federal injunction against 'taking any official actions for the prospect of personal gain for themselves or anyone else.'

The larger story here is the one I wrote about last week with regard to the Small Business Lending Fund, a $30 billion TARP-like capital program that the Obama administration is pushing Congress to pass. This program threatens to further corrupt and politicize the banking sector in ways that the Waters case illustrates perfectly. Maxine Waters wasn't alone in intervening to save a favored bank -- Sen. Daniel Inouye (D., Hawaii) did something similar on behalf of Hawaii's Central Pacific Financial -- but hers is the most egregious case and, so far as we know, the only one where a member's personal financial interest was at stake.

Rep. Barney Frank (D., Mass.) joined Waters in intervening on behalf of the Boston-based OneUnited. The bank did not appear to be a good candidate for TARP funds. TARP was ostensibly meant to shore up well capitalized, responsible banks hit by the credit crunch. According to a report in the Wall Street Journal, OneUnited 'had seen most of its capital evaporate. Moreover, it was under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives' use.'

Frank justified his intervention by pointing to the source of OneUnited's losses: Fannie and Freddie stock. 'I did feel that it was important to frankly try and save them since it was federal action that put them into the dumper,' Frank told the Journal. Frank was referring to the Treasury Department's decision to seize the companies, as if they would have otherwise been fine. Actually, it was Fannie and Freddie's own recklessness that put them in the dumper. But since this recklessness was encouraged by government officials such as Frank in pursuit of unrealistic homeownership goals, his statement turned out to be unintentionally true.

Waters has justified her intervention by arguing that she has a long history of advocacy on behalf of minority-owned banks. 'The accusations against me stem from work I have done throughout my decades of public service as an advocate for minority communities and businesses in California and nationally,' Waters said in a statement she released Monday after the Ethics Committee announced its charges against her.

These two statements by Frank and Waters are exhibits A and B in the case against creating more TARP-like programs, such as the Small Business Lending Fund. In the first one, Frank argues that a reckless bank deserves special treatment because, through its large investments in Fannie and Freddie, it aided the government in carrying out a reckless policy. In the second one, Waters justifies her improper intervention and argues away her financial interest in the outcome by arguing that OneUnited is a minority-owned bank, and thus deserves special treatment such as the intervention she provided.

It is perhaps because so many community banks witnessed the way in which OneUnited was saved that they are eager for Congress to create the Small Business Lending Fund. They see participation in the fund as a get-out-of-jail-free card. Increasing lending to start-ups in a risky political and economic environment -- one in which banks are lending precious little of their own capital -- may not be the wisest financial decision, but if they go broke, it would be better to be partners with the government. These banks can just take the Frank line: The government 'put them into the dumper' by encouraging them to take on the risk.

The Small Business Lending Fund would also include special set-asides for minority-, woman-, and veteran-owned businesses, and it would require banks to 'provide linguistically and culturally appropriate outreach' and 'serve low- and moderate-income, minority, and other underserved or rural communities.' Just imagine: If it designs the right menu of politically correct lending programs -- 'green' company, check; promotes affordable housing, check; union-friendly, check; minority-owned, check -- a community bank never need fear insolvency again. The U.S. government, if it continues down this path, is a different story.

-- Stephen Spruiell is a National Review Online staff reporter.

Full post as published by Bench Memos - National Review Online on August 03, 2010 (boomark / email).