OneUnited Bank among many hurt by Fannie Mae, Freddie Mac collapse

OneUnited Bank is under the microscope of banking officials, the media, and a Congressional committee for its relationship with Democratic Congresswoman Maxine Waters of Los Angeles.

Here's a look at the bank’s flaws and its financial tumble during the economic meltdown.

OneUnited Bank was in trouble long before Maxine Waters picked up a phone to call the Treasury Department. Regulators looked at its books two years ago and issued an order to clean up its act. That order criticizes its lending portfolio and executive compensation.

Wendell Cochran, senior editor at American University’s Investigative Reporting Workshop, says regulators didn’t like OneUnited’s loans to bank executives, or the Porsche and beach house it leased for its top executive.

But what nearly crushed OneUnited was its stock in Fannie Mae and Freddie Mac, the quasi-governmental lenders that guarantee about 70 percent of home mortgages. Cochran says when the federal government took over Fannie and Freddie, it shattered OneUnited. "They apparently lost a ton of money."

OneUnited wasn’t alone. More than one in three small U.S. banks owned Fannie and Freddie stock. Paul Merski, chief economist with the Independent Community Bankers of America, says there's reason for that. "Community banks are very limited in what they can invest in with their capital by bank regulation."

Merski says regulators encouraged community banks to put ready cash in “safe” investments, like Fannie and Freddie stock. But when the government took over the two giant lenders, it punched a hole in their stock value.

Merski calls it a “sneak attack.” He says former Treasury Secretary Henry Paulson "even claimed in his recent book on the crisis that it was an 'ambush,' that they wanted to quickly put Fannie and Freddie into conservatorship and everyone was left holding the bag. Even though bank regulators just weeks before were saying that Fannie and Freddie were safe and they had adequate capital levels and your investments in Fannie and Freddie were safe."

Merski says for most banks, the hit was big.

American University’s Wendell Cochran says for OneUnited, it was disastrous. "The bank had lost all of its equity." Cochran says big banks with foreclosures and repackaged mortgages on their books didn’t write them off as zeros.

"At that particular time," he says, "the issue was — particularly on the mortgage-backed securities — nobody knew what market was."

OneUnited called Maxine Waters for help. Her husband was a stockholder and a former member of the bank. The congresswoman sat on the powerful House Financial Services Committee. OneUnited’s senior counsel was also the incoming chair for the National Bankers Association, a trade group for minority-owned banks.

The association wanted a meeting with Treasury officials; Waters made the call. The House ethics committee says OneUnited was the only bank at the meeting. Wendell Cochran says bank officials asked the feds to make good on the Fannie and Freddie stock losses of $50 million.

He says you could partly argue that the federal government — because of what it did to Fannie and Freddie — exacerbated the bank’s problems. "I mean if I was the bank I might argue, look they helped create this mess. It’s only fair for them to help clean it up."

The bank didn’t get the $50 million it wanted. But a month after the government takeover of Fannie and Freddie, Congress created the Troubled Asset Relief Program — or TARP. Paul Merski says the ten largest financial institutions got an immediate injection of roughly $10 billion each from that TARP capital.

It took months — but eventually, more than 650 community banks got TARP money. OneUnited got $12 million dollars — but only after an additional $17 million investment from another bank. Some community banks have repaid their TARP money. So far, OneUnited has not.