By R. Jeffrey Smith
Washington Post Staff Writer
Friday, September 17, 2010; 2:25 AM
From the moment Boston-based OneUnited Bank began seeking a federal bailout in the summer of 2008, it received special treatment that went beyond what the Treasury Department or the bank and its political supporters have previously disclosed.
Congress adjusted the law and regulators broke with customary practices, despite an explicit internal warning that the bank was in financial trouble. Among other exceptions, the bank was allowed to count as part of its capital $12 million in federal bailout money - before the aid arrived.
OneUnited was the only bank to receive all of these considerations among the 707 recipients of money from the Troubled Assets Relief Program, according to documents and interviews.
A close look at how OneUnited - which is now at the center of an ethics investigation involving Rep. Maxine Waters (D-Calif.) - won bailout money shows how the Treasury Department, federal regulators and another influential lawmaker helped it despite its record of bad investments and extravagant spending.
A few internal warnings sounded by regulatory analysts now seem prescient, because OneUnited is one of only a handful of banks that have failed to make six promised TARP dividend payments to the government, in this case totaling $904,000. Its chairman, Kevin L. Cohee, said in an interview that this decision was "consistent with safe and sound banking practices" and that its TARP contract permitted withholding all dividends.
A Washington Post review of documents and interviews with many involved in the decisions show that regulators flagged the bank early on for its "highly visible" connection - in OneUnited's case, a former board member who is married to Waters, the chairman of an important banking subcommittee. The alert was part of a previously undisclosed practice at the Federal Deposit Insurance Corp. of trying to identify banks that might cause "unnecessary press or public relations" problems, according to testimony a top FDIC official gave to House ethics investigators.
Then, the bank won a rare chance to make its case for help to top Treasury Department officials, a meeting requested by Waters. When it became clear that the bank did not qualify, House Financial Services Chairman Barney Frank (D-Mass.) sponsored a legislative provision encouraging officials to provide special relief for banks such as OneUnited. Other favorable considerations followed.
Waters has said she did not violate any House rules. Her aides have said that OneUnited's TARP award followed a routine review and was not influenced by politics. Lori Bettinger, the TARP program's deputy director, similarly said in a January 2009 e-mail to colleagues that OneUnited qualified for its award under the same terms "used for all applicants."
A little-noticed report last year by a Treasury inspector general reached a different conclusion. It said that the review was irregular but that the decision appeared to have been based on "mitigating factors," rather than political pressure.
FDIC spokesman Andrew Gray, responding to questions, said that "OneUnited was going to fail" and that the agency stepped in "to avert a costly failure." He said Waters's known link to the bank had no impact on the agency's actions. Treasury spokesman Mark Paustenbach similarly called the review process "thorough" and insulated from "undue influence."
Cohee responded that "OneUnited received the TARP [award] based on the merits of its past performance and its future prospects." He added that the bank is not troubled and didn't need the award "to prosper."
OneUnited's predicament has been on the radar screen of the FDIC since 2007, when Waters's husband, Sidney Williams - a former professional football player and ambassador to the Bahamas - served on its board. Williams and, for a time, Waters herself had invested heavily in OneUnited stock. Although Williams left the board in April 2008, he retained stock worth about $350,000 in June of that year.
Regulators were worried about the bank's expenditures on its officers and its $50 million worth of investments in the stocks of two federally chartered mortgage lending companies, Fannie Mae and Freddie Mac, according to a sworn interview by Sandra Thompson, the FDIC's chief supervisory and consumer protection official, with House investigators. Her statements, obtained by The Post, have not been made public.
"We were concerned about corporate governance. We were concerned about internal controls. We were concerned about asset quality, and we had lots of questions about compensation" for Cohee and the bank's president, Teri Williams, his wife, Thompson said. "There was a Bentley, there was a Porsche, there was a house in Malibu, there was a personal trainer. . . . We told them they have 90 days to get rid of it. Do whatever you want, but the bank isn't going to be funding that sort of thing."
The personal trainer was Robin Downes, a self-proclaimed yoga "guru to the stars" in California, who confirmed in a telephone interview that OneUnited paid her $150 an hour to work with Cohee and Williams (who is not related to Waters's husband).
The FDIC was further surprised that the bank, which markets itself as an ally of the most impoverished neighborhoods in Los Angeles, Miami and Boston, appeared to have paid for club memberships and for parties featuring Hollywood celebrities, according to several sources familiar with its review.
Cohee defended the hiring of Downes, saying her work was "proactive for the health of critical employees." He also said that the bank had not paid for country clubs and that it held "marketing events," not parties.
Thompson told investigators that "we held the board accountable for these decisions" but said she did not know what role, if any, Sidney Williams had played. He declined to comment.
The Boston area director of the FDIC also was concerned that the bank's investments were too heavily concentrated in questionable assets, potentially leaving it without enough money to cover its customers' bad debts, Thompson said. "They had, like, the trifecta. They had Fannie, Freddie, Bear Stearns, AIG, Lehman Brothers - they had everything."
Over OneUnited's opposition, the FDIC lowered its nonpublic assessment of the bank's financial health after its 2007 inspection. After Fannie and Freddie stocks were devalued in August 2008, the bank's "capital was wiped out," she said.
The meeting on Sept. 9, 2008, that Waters set up with top Bush administration officials at the Treasury Department, after Cohee and Robert Cooper, the bank's general counsel, requested it, has been well-documented.
Waters has said she sought the meeting on behalf of a group of minority lenders that Cooper had been tapped to chair, not just OneUnited. Cooper began the meeting by noting that minority-owned institutions were "devastated" by the Fannie and Freddie stock devaluation.
Thompson, however, was dubious. She recalled that she had looked into the issue beforehand and learned that only two minority banks were harmed, OneUnited and a smaller Texas institution. She challenged Cooper, she said, by asking " 'How many?' Because I knew."
She said Cohee digressed to urge officials to provide a $50 million bailout for his bank. "He said, 'I just need you all to make us whole.' And I think people in the room just looked at him. It was a really different request."
After Cohee left, Thompson stayed behind with other regulators. "They were, like, surprised to be called over there for that," she said. "I've never heard of anything like that before. It's almost like open bank assistance, and there's a law that prohibits that."
Told of Thompson's remarks, Cohee said he could not discuss his interaction with regulators. He said the bank's decision not to pay the dividends demanded of all TARP grantees was "consistent with safe and sound banking practices" and the terms of OneUnited's contract, which gives the bank authority to withhold all such payments.
Waters has said that her only additional involvement with OneUnited's relief appeal came weeks later, when she mentioned its plight to Frank, whose Financial Services Committee oversees the FDIC and the Treasury Department.
Frank has said he recalls Waters coming to him with a "predicament." She was concerned about helping OneUnited because of her husband's prior board service but did not mention any stock holdings, he said.
He advised her to "stay out of it" and said that his staff would pursue the relief request because OneUnited - which was not in his district - "was a Boston bank and he had a commitment to minority banks," the ethics committee quoted him as saying.
Frank told a committee aide to raise the issue of ensuring that OneUnited and similar banks were eligible for assistance at a meeting with Treasury Secretary Henry M. Paulson Jr., while other aides contacted the FDIC. The department was "looking underneath sofa cushions" to try to help the bank, one aide told another in an e-mail on Sept. 19, but it lacked legal authority.
In late September, OneUnited's counsel suggested to a Waters aide that if Treasury declined the bank's request, there might be a "legislative solution." Frank subsequently inserted a provision into the TARP legislation to help the bank. He emphasizes that it was different from the direct payment OneUnited sought. It more generally authorized assistance to institutions serving low-income populations that lost significant capital from the Fannie and Freddie stock devaluation. No hearings were held on the bill, which President George W. Bush signed into law on Oct. 3, 2008.
The stated aim of the TARP program was to invest up to $250 billion in what the Treasury Department said were "healthy, viable" banks that needed extra capital to sustain more aggressive lending.
OneUnited promptly applied for a grant, and a special counsel in Frank's office in Newton, Mass., started calling Treasury officials, including Neel Kashkari - then the top official responsible for approving such grants. "BF is interested and may call" the Treasury secretary about it, one of the officials warned Kashkari and others in an Oct. 17 e-mail. "Maxine Waters is interested in the bank as well."
Ten days later, in what officials say was part of a deal negotiated with OneUnited, the FDIC formally issued a public cease-and-desist order charging the bank with lax lending standards, paying excessive executive compensation, and "committing violations of law and regulations."
Three days later, with OneUnited slated to issue a key quarterly report, the FDIC's five board members voted unanimously to exempt the bank from a 1995 accounting rule that binds every other bank under the agency's jurisdiction. In doing so, they cited the authority provided under Frank's amendment.
Two FDIC officials said that when the board members voted, they all knew of the bank's link to Waters. But they denied it influenced their decisions, the officials said.
The exemption allowed OneUnited to add $20 million to its stated capital without moving a penny. It was allowed to claim as existing assets all of the future tax benefits it could make because of the stock losses, exceeding a general rule barring any such claims above 10 percent of their capital. This step - a substantial risk for a bank facing financial trouble - proved critical in persuading Boston's State Street Bank to invest $17 million in OneUnited, an FDIC official said.
Two other banks, also responding to the devaluation of Fannie and Freddie investments, applied to the FDIC for a similar exemption. But when the agency informed them in late 2008 that the board was unlikely to approve, they withdrew their requests, according to a report by the agency's inspector general's office. Both banks - based in Houston and Madisonville, Tex. - were allowed to fail in October 2009.
Asked to explain the differing treatment, two FDIC officials said that unlike OneUnited, neither had a plan to raise new capital and neither was minority-owned. The FDIC operates under a law that requires "all of us to preserve and protect minority institutions," Thompson said.
Still, OneUnited did not meet the normal threshold for obtaining TARP money. As the inspector general for the TARP program, Neil M. Barofsky, said in a 2009 report that referred to OneUnited's troubles without citing its name, the bank had not met five metrics, indicating it was not adequately capitalized.
Moreover, the FDIC, in a memo to the Treasury Department analyzing its TARP application, warned explicitly that the bank was in a "precarious financial position" - a statement seemingly at odds with the TARP program's stated claim of assisting only healthy and viable banks.
But a committee of regulators and a group of top Treasury officials then departed from customary practices. They did so even though one Treasury member said that "he was very concerned about this bank," according to Barofsky's report.
The report said these reviewers decided that the bank's viability could be assessed "with applied-for TARP funds taken into account" as an existing capital asset on its balance sheet. In short, the reviewers assessed the bank as though it already had the money, to make it eligible for the aid.
The resulting $12 million boost to OneUnited's bottom line - again without a penny moving anywhere - finally allowed it to look healthy enough to win the loan, which Kashkari approved in late November.
"I feel very good about the rigor that we built into our process, [and] we followed it seamlessly," said Kashkari, now an investment banker. He said he could not speak directly about OneUnited.
Michael Nacyk, then controller at the privately held National Bank of Commerce in Berkeley, Ill., says he wishes Treasury officials had approved a similar TARP award for his institution. "We think we were very similar" to OneUnited, having experienced a comparable capital shortage after the Fannie Mae-Freddie Mac stock devaluation, he said. But his bank did not receive a response from Washington, even after filing a lawsuit in November 2008 to compel an answer, and he thought the delay was deadly.
Nacyk said his conclusion after regulators shuttered his bank in January 2009 was that "people who were well-connected got money; people who weren't didn't."
OneUnited's review was "contrary to the way that banks are typically analyzed pursuant to the Treasury guidance," Barofsky wrote, signaling "greater flexibility used in approving that application than accorded other applicants for TARP funds." He nonetheless concluded that "it does not appear" that the money was granted as the result of external influence, but because of three "mitigating factors" cited by the reviewers: the bank's plan to raise new private capital, its promise to fulfill the FDIC's cease-and-desist demands, and the legislative provision Frank added.
Jon T. Rymer, the FDIC's inspector general, concluded after looking into the FDIC's actions last year that "we found no improper political influence nor improper internal influences," he said in an interview.
He said his investigators did not speak directly with board members or review all of their correspondence and logs, but their deputies confirmed that the members knew that Waters's husband had served on OneUnited's board. Rymer said he was unaware, until being told by a reporter, of Thompson's statement that FDIC officials routinely flagged any bank connections to prominent people such as Waters.
"That causes me some concern," Rymer said. "If there is such a system, I need to know about it and how it's being used."
Research editor Alice Crites and staff researcher Julie Tate contributed to this report.