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Winkler: “Will Obama Campaign for Failing Banker?”

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By Rolfe Winkler, a former hedge fund analyst

Alexi Giannoulias — the whippersnapper IL State Treasurer and basketball buddy of the President — won the Democratic primary for Senate Tuesday night. Given Giannoulias’ troubling background, including ties to a bank that received a rebuke from FDIC just a week ago, how much political capital will Obama now want to spend defending his old Senate seat?

The Giannoulias story is classic Chicago. He was elected Treasurer at 29 with no substantial experience that would qualify him for the job. All he’d ever done was work as a loan officer and VP at Giannoulias family-owned Broadway Bank of Chicago.

How did he get elected Treasurer? Because Obama endorsed him. Why did Obama endorse him? Because the Giannoulias family had been big financial supporters for Obama’s Senate campaign (Alexi continued his financial support for presidential candidate Obama).

Broadway Bank has long been under the microscope, in particular for lending to known mafiosos. The bank also lent to convicted influence-peddler Tony Rezko….points emphasized by Giannoulias’ opponent in the Democratic primary, David Hoffman.

The latest twist in the story came a week ago, when FDIC issued a consent order to Broadway Bank instructing it to raise capital and cease unsafe and unsound lending practices. These are detailed in the order, but Crain’s Chicago Business has a helpful summary:

Under the terms of the consent order, Broadway must add at least $19 million to its reserves for losses from mounting delinquent loans. Subtracting that $19 million from the bank’s capital as of Sept. 30, it must raise $50 million or more within 90 days to achieve the capital ratios the order requires.

Among the ways to restore the bank’s fiscal health, the order lists “the direct contribution of cash by the directors and/or shareholders of the bank.” The Giannoulias family owns 100% of the bank’s shares.

Neither Mr. Giannoulias nor his older brother Demetris, CEO of Broadway, have commented to date on the family’s willingness to put their own money into the bank to save it.

The story notes that Broadway was one of the most profitable and fastest growing banks in Chicago during the 2000s. How did they do it?

Established three decades ago as a lender to small businesses in Chicago, many of them Greek-owned, Broadway evolved into an aggressive commercial real estate lender, making development loans all over the U.S. and funded mainly by high-rate brokered deposits.

When the real estate markets tanked, Broadway saw its loan quality deteriorate rapidly.

Brokered deposits to fund speculative lending…a shady tactic that has led to many a bank blow-up ever since the S&L crisis. There’s a reason FDIC regulates brokered deposits so closely — though not closely enough. Banks like Broadway get it in their head that they want to grow fast, so they collect deposit funding by offering above-market interest rates. Protected by FDIC insurance, depositors couldn’t care less if their savings end up funding speculative real estate deals, which is what Alexi and family did with the money.

When the consent order was released, AP asked Giannounlias about it. Considering he’d been a loan officer and VP at the bank, it was highly sensible to ask him about the bank’s lending. But he refused to provide details, saying such questions could wait till after the primary.

To its credit, the Obama White House appears to have realized that Giannoulias wasn’t a guy it wanted to see rise any higher politically. The White House tried to recruit State Attorney General Lisa Madigan to run for the senate seat though it knew Giannoulias was angling for it.

Illinois is a very blue state, but has had Republican senators before, most recently Peter Fitzgerald. And the Republican candidate is beating Giannoulias in early polls. The big question is how much political capital Obama will spend campaigning for Giannoulias. He’ll endorse him since he is the party’s candidate. But will he campaign heavily for him despite Giannoulias questionable background and qualifications?

Another question is whether politics will be allowed to trump bank regulation here. The consent order gives Broadway Bank 90 days from 1/26/10 to raise capital, but the family hasn’t said it will pony up (and where else is the money going to come from? Who would want to buy equity in this bank?). Anyway, the general election is 268 days away. If new equity isn’t forthcoming, there’s no reason the bank should survive to election day. If it is closed and put into receivership, it could be a death blow for the Giannoulias candidacy. There are numerous examples of politicians pressuring bank regulators not to close community banks in their districts. Might Dems pressure regulators not to close Broadway, lest it cost them another senate seat?

If they’re smart, Dems will let bank regulators close Broadway. At that point they may be able to pressure Giannoulias to get out of the race. Whoever replaces him would have a much better shot at retaining the senate seat…

Rolfe Winkler is a Reuters columnist. The views expressed here are his own.

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13 comments

  1. albrt

    I think it’s pretty clear what Obama should do.

    He should make speech about a bunch of programs that would be sort of popular, and have his picture taken standing next to somebody who has previously suggested programs of that type, and then not provide any specifics and not follow up in any way whatsoever.

    This is a really good plan, and I am pretty sure it can be adapted for the Illinois Senate election, but I will leave it to Rahm Emmanuel and the other political geniuses at the White House to work out the details.

  2. attempter

    Bush lives, right down to the cronyism.

    A year ago, when Obama appointed Duncan (another “basketball buddy”) education secretary, people questioned whether this was nothing other than Bush-style cronyism, since Duncan’s far-right record as Chicago schools superintendant (an obsessive focus on privatization and militarization) directly contradicted everything Obama the candidate had said about education.

    Of course today we know Duncan’s corporatist ideology is perfectly in line with Obama’s ideology, and the whole campaign was a lie.

    But this bankster sounds not like the secret sharer of Obama’s neoliberal ideology, but just a sleazy little worm, just a run-of-the-mill crook.

    So I guess in this case Obama will want to make it clear once and for all that he can do direct Brownie-style cronyism with the best of ‘em.

    1. Kelli K

      Did Bush invent cronyism? I had no idea. Guess I hadn’t given him enough credit.

      I’m no fan of Obama’s or Duncan’s but you grossly mischaracterize the latter’s education record. Chicago has the 2nd most miserable public ed in the country (DC is the worst, but they may be improving, so hold there is hope we may take the booby-prize sooner or later).

      Duncan did not militarize or corporatize the schools. He threw a bunch of ideas (and a lot of money) against a wall in an effort to see what might work. Well, what would you do? Continue throwing money down a rathole and condemn kids to lives of violence and poverty?

      In fact, his biggest mistake was not to take on the powerful teachers’ unions, but then Daley never gave him authority to do so, as union coddling worked well for him (until it started to eat the foundations of the city out from under him, which has led to a crash in his popularity).

      But then, at least Duncan had some ideas about improving schools, however half-baked. Obama funnelled millions of Annenberg dollars through the sewer system in the 90s with zilch to show for it. Had anyone been paying attention, this might have given his supporters pause.

      What he did get out of it was a strong “base” of support from which to catapult himself into the senate and then the White House. Sorry kids, priorities!

      Giannoulias is a totally different animal. I suspect that the Rezko threat rather than basketball solidarity played the major part in his endorsement for Treasurer. Obama is smart enough to see what a liability the guy is and tried mightily to get Lisa Madigan to run (anyone, help?).

      But I do enjoy the way national media always call them buddies.

      And talk about a Hobson’s Choice! The family can either put all the money they stole from the bank back into it or they can watch sexy Lexi go down in flames when the feds shut Broadway down a few weeks or months before the election. Hardy har har.

  3. Kevin de Bruxelles

    Doesn’t the term “failed banker” become an oxymoron when describing someone with the political connections of Alexi Giannoulias?

    1. DownSouth

      Really, this is like déjà vu of the George Bush disaster. These guys simply are not allowed to fail.

      • Admitted ex-alcoholic and suspected abuse of other substances
      • Daddy’s connections got him through an Ivy-league school
      • Instead of serving in the war, Daddy’s connections got him a reservist position, which he failed to show up for
      • Daddy’s connections bailed him out of his misadventures in the oil business
      • Daddy’s connections got him a job as president of a sports team, with no prior experience in that field
      • Rode on Daddy’s coattails to the governorship of Texas
      • Rode on Daddy’s coattails (and Daddy’s connections in the Supreme Court) to the presidency of the United States

      When he got to the presidency he finally got to a place where Daddy no longer had sufficient connections to bail him out, and what a miserable failure he proved to be.

      1. Ignim Brites

        Hey Downsouth: Enough with the BDS.

        Let’s look at Bush’s record of accomplishment.

        (1) Saved the US economy from the consequences of the bursting of the dotcom bubble.
        (2) Saved the US economy from a collapse of the financial infrastructure after 9/11.
        (3) Saved the US airline industry from collapse after 9/11.
        (4) Rationalized Medicare by including a prescription drug benefit.
        (5) Liberated Afghanistan from the Taliban.
        (6) Liberated Iraq from Saddam Hussein.
        (7) Defeated Al Qaeda in Iraq.
        (8) Guaranteed the independence of Kosovo strenghtening the stability of the Balkans.
        (9) Fast tracked the expansion of Nato strenghtening the future stability of Europe
        (10) Made two of the best appointments to the Supreme Court in recent history.
        (11) Created a vast program for addressing the problem of HIV/AIDs in Africa.
        (12) Introduced the first measures of national accountability in US Public Education
        (13) Paved the way for the election of a African American as President by having successively two African Americans in the highest profile cabinet position.
        (14) Layed the legal foundation for the prosecution of the war on terror.
        (15) Strengthened the integrity of the nation by respecting the wishes of a Democratic governor of Southern state to not immediately send in Federal troops after a natural disaster.

        Pretty impressive.

        1. Anonymous Jones

          Wow, you just ‘layed’ the smackdown!

          Consider me deranged no more.

          [Seriously, I know I'm not supposed to mock poor spelling or grammar, but where do these people come from? Do they really think everyone else is stupid? Or are they so imbecilic that they can't even grasp the concept of intelligence and that others might have some of it? Sorry...go back about your business, and now that I have this new standard, I'm going to add at least fifteen pages of 'accomplishments' to my resume!]

  4. Warren Pease

    There are many different routes to power in the U.S., Choate/Exeter/Andover to Yale/Harvard, P.S. 934 to Columbia on scholarship; beauty pageants and obscure 3rd tier (within that state system) commuter colleges to PTA’s to small state governorships, etc. Then there’s this guy, getting it the old-fashioned way – through connections.

    Did Socrates really nail it when he argued that pursuit of power really ends in being enslaved? It’s getting harder for me to see it otherwise. In a way this is not the worst outcome, but it’s certainly not ever likely to please idealists (which I still have a little spark of).

    Please see this extraordinary painting:

    http://www.mnprogressiveproject.com/diary/4512/was-mary-kiffmeyer-lying-then-or-is-she-lying-now

    Scroll roughly 40% down. Although it’s described as “Jesus at the closing table,” my own time-and-place zeitgeist would call it (more accurately, IMHO) “Jesus and Billy Day Williams selling us down the river.”

  5. Steve

    The race for this senate seat officially ended when Democrats selected Gianoulias over Hoffman, a decision that was pure madness. Alexi was your typical privileged C student his whole life. He gets “hired” by his father’s bank which he proceeds to help run into the ground while dealing with some rather unsavory characters. Then, with no credible experience of accomplishment of his own merit, he gets elected to Treasurer of Illinois for no other reason than he’s basketball buddies with Obama. As Treasurer he oversees the finances of perhaps the most bankrupt state in the nation. He personally directs funds for a college savings program into subprime and various CDO’s which blew up. His record of failure at every stop in his brief life is indisputable. Saying he’s a leader or qualified to be a senator is like trying to convince me the sun rises in the west. Hoffman was a terrific candidate…the Dems will deserve this loss in November. Isn’t Illinois politics great?

  6. weinerdog43

    Thanks prostrated. Great article.

    As an Illinoisan, I found out about young Alexi’s bank troubles fairly recently. He had been cruising with a double digit lead until about 2 weeks before the primary. His eventual margin of victory over Hoffman was a measly 5 points. Mark Kirk is a typical Republic party moron who will add nothing to the Senate.

    Very depressing.

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