I don’t remember the section on “karma” in finance class

Posted by Marc Hodak on May 13, 2010 under Politics | 2 Comments to Read

At Wharton, I was taught that there was exactly one reason to invest in an asset:  you would get more out of it than you put into it.  That’s the definition of value creation.  So, why would anyone invest in ShoreBank, a bank that has proven to be a massive money loser?

People familiar with the situation said Goldman initially declined to invest in ShoreBank. Within the past week, people familiar with the effort to save ShoreBank say Goldman agreed to commit about $20 million to the bank. That would make it one of the largest investors, according to people familiar with the talks. Goldman Sachs declined to comment on its involvement in the rescue effort.

Well, it would be difficult for Goldman to publicly acknowledge that it’s basically donating $20 million as a political sop to President Obama.  But that’s what they’re doing.  They aren’t the only one:

If Goldman invests, it will join a group that tentatively includes Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co., among others, people familiar with the discussions say. BofA, Citigroup and J.P. Morgan all declined to comment.

Because it would be really tough to say, “President Obama has let us know that he would really, really appreciate it if we helped out ShoreBank.  He’s just concerned about them, you know.  And he has our nuts in his grip.”

Another Illinois politician was slightly more direct.

Bill Brandt, chairman of the Illinois Finance Authority, said. “I know that Mr. Blankfein and his marvelous organization have been much in the news of late, and I can sympathize with their desire to change the narrative.

If Goldman could change the narrative for a mere $20 million, they’d do it in a second.  But one can only change the narrative if one looks like they are doing this thing all on their own, and not because they are being shaken down by the feds and state.

A spokeswoman for Eugene Ludwig, a former U.S. comptroller of the currency who is working with ShoreBank to raise capital, said the White House and Chicago city officials haven’t been involved in encouraging the fund-raising effort among big banks, describing it as “totally a private-sector initiative.”

But of course.  So, again, why is this particular bank of such interest to the rest of the private sector?

“There’s been a lot of very determined voices about doing it because it’s the right thing to do,” a person familiar with the effort to save the bank said. “It’s an important institution, an icon, and we don’t want to see this one fail.”

President Obama drew attention to the bank’s micro-lending efforts while traveling in Nairobi as a senator. ShoreBank co-founder and now president Mary Houghton offered guidance on small-business lending to Mr. Obama’s mother, who worked on similar issues in Asia. Officers and employees of ShoreBank gave Mr. Obama’s 2008 presidential campaign a total of $12,150, according to data from Center for Responsive Politics.

In January, the Illinois Finance Authority considered assisting ShoreBank. Mr. Brandt, the authority’s chairman, said he and George Surgeon, ShoreBank’s CEO, are childhood friends, and Mr. Brandt was sympathetic both to ShoreBank’s “historic” status and to its request for a state bond issue to finance a bailout.

So, private banks are making this investment because:

– It’s the right thing to do

– The bank’s leadership and the President go way back

– The state finance authority chairman and bank’s CEO are childhood friends

Nothing about NPV or ROI, except some mention that the bank has long since been ignoring those factors, which all adds up to my favorite explanation:

“Sometimes a bank like ShoreBank has to rely on karma, and the planets seem to have aligned to provide some karma with respect to this particular deal,” Mr. Brandt said.

Yeah, planets aimed at the bankers’ testicles.  Welcome to the new world of political lending.