This was the first time Congress had provided a legal definition for minority banks. The definition itself revealed just how muddled the issue of black banking had become and how far the concept of black capitalism had migrated from its initial purposes. During the era of Jim Crow and strict segregation, a legal definition for a black bank was unnecessary—a black bank was one that served black customers in a black community. When Nixon issued Executive Order 11458 establishing the OMBE and the black capitalism framework, he did not include a legal definition—it had been fairly obvious that he was talking about establishing black-owned institutions in the ghetto as a response to black riots and the black power movement.54 However, after the initial crisis had passed, the Nixon administration began speaking more vaguely about “minority business enterprise." According to some observers, this was because Nixon had seen the political utility in courting the Mexican vote. In fact, his only minority appointment to his administration was conservative Mexican, Hilary Sandoval, to head the SBA.55
In 1971, Nixon revised the initial black capitalism program through Executive Order 11625, which for the first time defined the term “minority business enterprise" as a business that was “owned or controlled by one or more socially or economically disadvantaged persons. Such disadvantage may arise from cultural, racial, chronic economic circumstances or background or other similar cause. Such persons include, but are not limited to, Negroes, Puerto Ricans, Spanish-speaking Americans, American Indians, Eskimos, and Aleuts." It is fair to say that this vague and convoluted definition affords as much clarity as could be expected from a program that began as an ill-defined political response to an acute national crisis. The categories of disadvantage had been loosely expanded over time—for example, to include female-owned businesses.
The FIRREA legislation was now creating a specific regulatory program aimed at minority banks, and so it created a binding legal distinction. That definition was not just ambiguous; it also revealed the doublespeak at the heart of the federal policy framework around black capitalism. Section 308(b) defined a minority institution as a bank that is 51 percent owned by “one or more socially and economically disadvantaged individuals." For public banks, it required a majority of stockholders to be “socially and economically disad-vantaged.”56 The statute did not go on to define what this meant or how it should be interpreted. To further the confusion, when the act defined minority “cooperatives” or “mutually owned minority banks” in the very next sentence of the section, it changed the definition of a minority bank to one that has a “majority of the Board of Directors, account holders, and the community which [the bank] services is predominantly minority.” The act then defined “minority” as “any black American, Native American, Hispanic American, or Asian American.”57 In defining a minority institution simultaneously as one that serves economically disadvantaged individuals and one that serves a defined group of minorities, the act underscored the conflicting agendas that bred black capitalism.
In order to enforce Congress’s mandate, the confused regulators simply created their own definition. “Given the ambiguous nature of the phrase ‘socially and economically disadvantaged individuals,’ ” the FDIC regulators threw up their hands and said that they had determined that a minority deposit institution was one that is majority owned by U.S. citizens who are “Black American, Asian American, Hispanic American, or Native American.” The OTS did the same.58 The black capitalism program was a response—albeit a misguided one—to remedy past discrimination and to provide a boost to the economically disadvantaged ghetto. But the Supreme Court had put an end to any programs meant to remedy past discrimination, so the purpose of the program had shifted to focus instead on diversity and providing positive role models for marginalized groups. But this new program was utterly disconnected from dealing with economic disadvantage, which rendered the entire framework meaningless. In other words, the best way to describe the federal government’s regulatory apparatus as it related to black banking was as a “tangle of pathology.”
President Clinton brought some much-needed clarity to policy as he revitalized the black capitalism programs. He began to talk about black banks the way Nixon initially had, as a means of confronting black ghetto poverty. But in the new color-blind reality, he did so without mentioning race. President Clinton, calling himself a “New Democrat,” proposed a “third way” politics situated in between traditional Republicans and Democrats. Clinton slashed welfare benefits, which he believed caused a “cycle of dependence.”59 He did expand the Earned Income Tax Credit, Head Start, and increased the minimum wage, which he said properly “emphasize[d] work and independence.”60 However, instead of resurrecting Johnson’s soaring rhetoric and ambitious War on Poverty, Clinton tried to steer the party away from it. In fact, both Clinton’s and Carter’s rhetoric and actions on racial equality followed President Nixon’s lead as opposed to their Democratic predecessors.
Clinton embedded his urban poverty programs firmly in libertarian market ideology, which held that private enterprise operating in free markets would be the answer to poverty. The country’s racial ghettos, created by Jim Crow laws and policies, whose walls still remained intact, came to be referred to as enterprise zones, emerging markets, and niche industries. These were places that could surely yield a profit if creative entrepreneurs looked hard enough.
Clinton signed a series of laws that provided tax inducements to encourage private firms to invest in impoverished communities.61 Clinton’s policies provided an incentive-based boost to Nixon’s black capitalism framework. Nixon had tried—with minimal effort—to induce large white-owned firms to voluntarily contribute to black businesses as a civic duty. And that is how the firms themselves had viewed their involvement. Clinton’s program also relied on private businesses to pour money into the ghetto, but he did not appeal to philanthropic aims at all; he promised profits. Clinton’s HUD secretary, Andrew Cuomo, told reporters that it “is not about charity. It’s about investment.”62 Academics and progressive reformers agreed that ghetto poverty was just a result of misaligned market incentives and could only be addressed through private enterprise. Influential Harvard Professor Michael Porter wrote that instead of aid or social investments, the only way to build the economy of the ghetto was “through private, for-profit initiatives and investment based on economic self-interest and genuine advantage. . . . The cornerstone of such a model is to identify and exploit the competitive advantages of inner cities that will translate into truly profitable businesses.”63 Ghettos were labeled “emerging markets” and “untapped markets,” which contained hidden opportunities that profit-oriented private enterprises could exploit, creating a win-win of profits for the entrepreneurs and poverty alleviation for the ghetto. Instead of working to break down the walls of segregation and the poverty trap they had created, the ghetto would be sent entrepreneurs.
Because of the color-blind delusion, now enforced by the Supreme Court, these programs had to be race neutral. Instead of black capitalism, it was “community capitalism." In 1997, a conference called the American Assembly brought together business and community leaders and academics to discuss poverty and community development. The final conference report urged policymakers to “energize community capitalism in distressed areas." Community capitalism was defined as a “for-profit, business-driven expansion of investment, job creation, and economic opportunities in distressed communities, with government and the community sectors playing key supportive roles."64 Vice President Al Gore endorsed the report, stating, “The greatest untapped markets in the world are right here at home, in our distressed communities."65
Just like Nixon’s black capitalism, Clinton’s “community capitalism" was a bipartisan winner. Missouri Republican Representative James Talent heralded the proposed program as “not only the most comprehensive antipoverty package coming out of the federal government . . . in a generation, but it also . . . has assimilated the lessons that people on both sides of the aisle have learned o
ver the last generations."66 Jesse Jackson enthusiastically joined Clinton’s community enterprise agenda with his 1998 “Close the Gaps. Leave No American Behind" campaign. Jackson proposed that the president create “vehicles to move capital" into disadvantaged areas. Clinton joined Jackson’s 1999 “Wall Street Project" conference to promote community capitalism, during which the president told attendees that “the largest pool of untapped investment opportunities and new customers are not beyond our shores; they’re in our back yard."67
Black leaders praised Clinton’s $38 million boost to MBDA in 1994, as well as his order reinforcing Reagan’s designation of Minority Development Enterprise Week. Clinton declared that the “growth and development in the minority business community are crucial to the social fabric, as well as to the overall economy, of this Nation."68 Minority businesses, he said, would “prove that we can bring the benefits of free enterprise to every neighborhood in America." All free enterprise needed was a nudge from the tax code.69
Clinton’s “community capitalism" program as applied to banks was embodied in the Riegle Community Development and Regulatory Improvement Act of 1994, commonly known as the Community Development Banking Act (CDBA).70 The act provided tax incentives for banks, or Community Development Financial Institutions (CDFIs), that served underprivileged areas.71 President Clinton said that the bill was inspired by a living bank that was putting the theory of community capitalism into practice. South Side Chicago’s Shore-Bank was the country’s most famous “black bank," even though it was not black-owned. As white flight accelerated in Chicago after the 1960s, the remaining South Side banks followed their white customers out.72 ShoreBank was one of the few remaining banks, but only because their request to move was denied by its regulators. A group of civil rights activists—Ronald Grzywinski, Milton Davis, James Fletcher, and Mary Houghton—acquired the bank in 1973.73
ShoreBank’s motto—“Let’s Change the World"—was not an empty marketing pitch. The exemplar of community capitalism, the bank promoted a “triple bottom line: profitability, community development impact, and an environmental return."74 ShoreBank’s primary aim was to fight urban decline. At its peak, it had $4.1 billion invested in inner-city Chicago.75 The bank’s ambitious mission drew many admirers, including Grameen Bank founder Muhammad Yunus, who visited the bank before launching microcredit in Bangladesh and receiving a Nobel Peace Prize for his innovative approach to poverty.76
This is not to say that the bank didn’t struggle against the same profitability trap that had ensnared black banks for nearly a century. For the first ten years, the bank lost money because its loans were risky, deposits were small, and operation costs were high.77 In short, ShoreBank’s founders came to the same realization that many had before them—that operating a profitable bank in a poor and segregated ghetto is a challenge. Still, ShoreBank enjoyed more outside “socially inclined" capital investment than most black-owned banks. They had private funders who “invested with the understanding that the primary purpose of their investment is to do development and not maximize return on capital."78
Bill Clinton had visited the bank in 1985 as Arkansas governor and called it “the most important bank in America."79 In promoting the ShoreBank model, Clinton outlined his early vision for community empowerment:
You have to enable people to take control of their own destiny. We need to create a small-business entrepreneurial economy in every underclass urban area and rural area in the country through the use of banks like the South Shore Bank, which played a major role in revitalizing the South Side of Chicago. To most people, “empowerment" sounds like a buzzword, but the truth is that America can’t get very far with a dependent or helpless population. Trying to create an entrepreneurial economy around a different sort of banking system, investing in public-works jobs in the near term and giving people control over their living conditions and requiring them to take more responsibility for it—those are the kinds of things that I think would make a real difference.80
What he called a “different sort of banking system" was one in which a community’s banks were “owned and operated by the people who live there." This had been the theory of black capitalism all along—the premise being that control of banking within a community would lead to “empowerment" and economic equality. This philosophy was not new, but Clinton would back up his vision of community capitalism with significant tax credits, unlike previous administrations, whose support of the idea was limited to rhetoric.
In 1992, Clinton made a campaign promise that he would establish one hundred banks modeled after ShoreBank across the country.81 The result was the CDBA, which promised to “promote economic revitalization and community development through investment in and assistance to community development financial institutions." The law was race-neutral, but its clear mission was to propagate more banks in the ghetto just like ShoreBank. These banks, called CDFIs, were defined as institutions that (1) had “a primary mission of promoting community development"; (2) “[served] an investment area or targeted population"; and (3) “provide[d] development services in conjunction with equity investments or loans."82
This “third way" approach to black banking found proponents across the racial and political spectrum. African American Senator Carol Mosely-Braun remarked that the bill “suggests that the financial institutions can do well and do good simultaneously . . . that financial institutions can make money by expanding credit opportunities to underserved communities."83 Republican Congressman Tom Ridge remarked that “communities without credit are very much like land without rain, nothing grows."84 Democratic Senator Ted Kennedy said that “whole segments of our people in this country are unfairly denied access to credit, [it is our job] to make certain that financial institutions make credit available to all of those people who can afford to pay it back."85 The issue at hand, according to one senator, was “not whether community development banks are a good idea . . . , but rather how do we establish them."86
The central theory behind the CDFI was that it would find heretofore hidden profits in the ghetto. Former Treasury Secretary Lawrence Summers envisioned “[a] successful CDFI [as] perhaps best compared to a niche venture capital firm that deploys its superior knowledge of an emerging market niche to invest and manage risk better than other investors."87 Summers labeled these banks “market scouts" that would seek out profits in overlooked markets. Yet black-owned banks had long been using their “superior knowledge" to try to make profits in the ghetto, only to find that the stubborn financial ecosystem of the ghetto economy had always stood in the way, as CDFIs would soon learn. Like black-owned banks, CDFI’s have struggled to remain profitable despite help from the tax code. CDFIs routinely show weaker financial performance across the board compared with their more conventional peers.88 The lodestar, Shore-Bank itself, did not fare well, and its eventual demise would be as newsworthy as its rise.
The CDFI fund got a boost in 2000 with the New Market Tax Credit (NMTC), which was created to “direct new business capital to low-income communities, facilitate economic development in these communities, and encourage investment in high-risk areas." The NMTC was passed along with the New Markets Venture Capital (NMVC) initiatives, and Clinton called them “the most significant effort ever" to help distressed communities by leveraging private in-vestment.89 The bill provided that any project whose primary aim was to invest in low-income communities would get a tax break equaling 39 percent of its investment over time.90 However, the design of the program carried certain distorting features that made it more likely that funds would flow toward projects or proposals that were more profitable, rather than those that were more effective at meeting the program’s goals. One reason was that the Treasury, the fund’s administrator, used geography to determine what areas were disadvantaged. This would not seem to be a problem as poverty was usually concentrated in geographically defined ghettos or rural areas, but the areas marked as eligible were too large and included affluent downtown business areas close to histori
cally disadvantaged ghettos. For example, Wall Street was initially classified as an eligible low-income area.
Moreover, Treasury, whose institutional concern was to maintain the fund’s profitability, consistently chose projects that promised more profits and had less risk. The majority of CDFI investments have gone to real estate developments in low-income communities, and the recipients have been larger, more established banks.91 Minority banks have been essentially shut out of this program—since its inception, only between 2 and 6 percent of these funds have been awarded to minority banks.92 Funds meant to revitalize the ghetto have instead gone to firms outside the ghetto that have financed development projects within it, a situation that only exacerbated the ghetto’s profit leakage.93 For a mission focused on extracting profits from enterprise zones, this is not surprising.
If the CDFI fund was rooted in the black capitalism model, the Community Reinvestment Act (CRA) was rooted in the original affirmative action model. Its justification was to remedy a history of discriminatory redlining, and its mission was to require mainstream banks to lend a fair portion of their loans to the ghetto. Although redlining had been based on explicit racial discrimination, the CRA had to be designed to be color-blind. Much like affirmative action, the act has been one of the most vilified of banking laws, even as it was criticized by civil rights groups as “toothless" in counteracting the legacy of past injustices such as redlining.94
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