The bank at the center of a House ethics investigation of U.S. Rep. Maxine Waters was the weakest to receive funds from the government's Troubled Asset Relief Program at the time of its rescue, according to an analysis by the Investigative Reporting Workshop.
When then-Treasury Secretary Henry Paulson announced creation of the so-called "Capital Purchase Program" in October 2008, he said it was directed at "healthy institutions." Nevertheless OneUnited Bank of Boston received a $12.1 million capital injection from the Treasury Department on Dec. 19, 2008. The money has not been repaid, according to Treasury Department documents.
Records show that as of Sept. 30, 2008, the latest quarter before the investment, OneUnited had "Tier 1 capital" of just 1.8 percent of assets. Of the 363 banks that got TARP money in the fourth quarter of 2008, at the height of the financial crisis, that was the lowest Tier 1 ratio.
In fact, none of the 987 banks that got TARP money between October 2008 and December 2009 reported a lower ratio in the quarter before they received federal cash. As of March 31, 2010, 16 TARP banks had lower Tier 1 ratios then OneUnited's 4.98 percent.
Waters, a Democrat from Los Angeles, is alleged to have set up a meeting with regulators to help the bank, on whose board her husband served. OneUnited is based in Boston, but it has major operations in Los Angeles and Miami.
Tier 1 capital, which includes equity plus disclosed reserves, is considered by many banking experts to be the best way to gauge a bank's financial health. Banks are required to have a minimum Tier 1 ratio of 3 or 4 percent, depending on their classification, according to rules posted by the Federal Deposit Insurance Corp.
Citibank, for example, had a Tier 1 capital ratio of 6.4 percent as of Sept. 30, 2008, the quarter before its parent company began getting TARP funds.
OneUnited might have raised additional capital before getting its TARP funding, but public records were not available to determine whether that happened.
The bank had other problems besides its weak capital position. OneUnited is one of only a few banks to be under a federal supervisory enforcement order at the time it received TARP funding.
On Oct. 27, 2008, the Federal Deposit Insurance Corp. and Massachusetts Division of Banks issued a cease-and-desist order to OneUnited. The order, which is still in effect, said the agencies "had reason to believe that the Bank had engaged in unsafe or unsound banking practices and violations of law."
The order cited the bank's capital position, poor oversight of officers, "excessive" executive compensation, weaknesses in loan underwriting and "speculative investment practices."
The agencies gave the bank a detailed plan of corrective action. It has not yet met all those goals.
For example, it was required to increase its Tier 1 capital ratio to 5 percent of total assets. According to its June 30, 2010, report to the FDIC, its Tier 1 ratio, even with the TARP money, was 4.5 percent.
The bank, which has almost no common stock, was told to increase common stock accounts to half its total capital; the reports show it has made no progress toward that goal in the past two years. It has another two years to meet that deadline, according to the order.
OneUnited officials did not respond to e-mail messages and telephone calls seeking comment on this story.
OneUnited Bank's problems, like those of many banks, are tied to the nation's housing collapse. But unlike many banks, its losses are not primarily due to bad loans. Indeed, a statement from Chairman and CEO Kevin Cohee on the bank's website says, "we never participated in subprime lending."
Rather, it invested heavily in securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. — Fannie Mae and Freddie Mac. The two congressionally chartered companies were taken over by the government in September 2008.
Federal records show that upward of a third of the OneUnited's investment portfolio was tied to those two shaky institutions.
According to the FDIC report, in the third quarter of 2008, OneUnited had to write off more than $50 million when its investments in Fannie Mae and Freddie Mac stock became virtually worthless after the government takeover, which wiped out shareholder value. Even before the takeover, the stock had lost a large part of its value.
OneUnited, like many banks, has also seen its portfolio deteriorate over the past three years thanks to a prolonged recession, high unemployment and continuing weakness in the housing market. As of the end of March, the bank's troubled-asset ratio, as calculated by the Workshop, was 56 percent.
The ratio measures a bank's nonperforming loans and foreclosed properties against Tier 1 capital and loan-loss reserves. As of March, the latest data available, more than 900 banks -- including more than 130 TARP banks -- had higher ratios than OneUnited. Most banks that fail have a ratio of well over 100 percent.
Bank officials began asking Waters to help arrange meetings with regulators in late August 2008, with the requests growing more urgent as the takeover of Fannie and Freddie was unfolding, according to the House Ethics Committee report.
When Paulson and other federal banking officials met with representatives of OneUnited and the National Bankers Association on Sept. 9, 2008 — just two days after the takeover — the key topic was how the failures of Fannie and Freddie were affecting minority-owned banks. The National Bankers Association is a trade group for minority-owned banks.
OneUnited is "the first Black-owned Internet bank, the first Black-owned interstate bank and the largest Black-owned and managed bank in the country," according to its website.
While it is not unusual, or improper in most cases, for members of Congress to arrange meetings with administration officials for their constituents, the Ethics Committee alleges that Waters helped set up the meeting to help protect her own financial interests, which is against House rules.
The probe is focused on the fact that Waters’ husband, Sidney Williams, owned stock in the bank and served as a director from 2004 until April 2008. Investments in the bank and dividends from the bank were included in financial disclosure forms Waters filed with the House.
Waters has vigorously denied the charge and has asked for a public hearing before the November election. Paulson told House investigators he didn't know of Williams' position with the bank.
The ethics panel report shows that Cohee, the bank CEO, and Robert Cooper, the bank's lawyer, who is now chairman of the National Bankers Association, attended the meeting. Though other banking association officials attended, OneUnited was the only bank directly represented in the session, according to the report.
Essentially, the bankers asked Treasury to make good their investment in Fannie Mae and Freddie Mac stock. There is no evidence that Treasury ever took any action on that suggestion, although the later bailout bill did include a provision that altered tax treatment for losses on those securities.
When the meeting occurred, the $700 billion TARP program did not exist. Congress passed the Emergency Economic Stabilization Act of 2008, approving the program, in early October. Paulson had originally conceived of TARP as a way of taking toxic assets — bad loans and underwater mortgage-backed securities — off the books of the banks. The Treasury secretary quickly junked that idea and instead decided to make direct investments in banks.
Documents provided to the Workshop after a Freedom of Information Act request show several members of Congress asked the Treasury Department to consider TARP investments for particular banks. But the documents do not contain any mention of OneUnited, nor any correspondence from Waters to the department about OneUnited or any other bank.