The Wrongologist

The Daily Escape:

Beach near Avon Fishing Pier, NC – April 2021 photo by Greg Kiser

Many of you know that Wrongo spent many years as a banker for one of the top-three US banks. Banks have several challenges when trying to make a buck. They must first find a borrower. The borrower must be able to afford and repay the loan, and when the loan is repaid, the banker must find another borrower. That summarizes the raison d’etre for loan officers and banks in general. Full disclosure: Wrongo receives a pension from the big bank.

That background may help with the following story from the NYT:

“The Biden administration’s efforts to provide $4 billion in debt relief to minority farmers is encountering stiff resistance from banks, which are complaining that the government initiative to pay off the loans of borrowers who have faced decades of financial discrimination will cut into their profits and hurt investors.”

This debt relief is part of the $1.9 trillion stimulus package that Congress passed in March. It is intended to make amends for the discrimination that Black and other farmers of color have faced from lenders and the United States Department of Agriculture (USDA). More from the NYT:

“But no money has yet gone out the door. Instead, the program has become mired in controversy and lawsuits. In April, white farmers who claim that they are victims of reverse discrimination sued the USDA over the initiative.

Now, three of the biggest banking groups — the American Bankers Association, the Independent Community Bankers of America and National Rural Lenders Association — are complaining about the cost of being repaid early.”

The impacted banks will receive 120% of the outstanding loan balances. They are getting that additional amount to help cover their costs and taxes. Their complaint is that 120% isn’t enough, that they have been short changed because they won’t receive future interest on a loan that will no longer exist.

What has happened to corporate America if this is really a legitimate issue?

When a bank loan is repaid early, the bank now has that money available to lend again. The bank isn’t losing money, they’re losing the ability to earn the total return they projected when they originally made the loan. Most loans have a right of prepayment, usually without penalty. So, once repaid, the bank has an opportunity to create new loans and a new earnings stream with a new borrower.

Where’s the problem unless Wall Street requires another bail-out because they can no longer operate profitably under their basic business model?

A glitch is that the banks do not always hold the loans they originate to maturity. Instead, they package them and sell them to other investors. The bank lobbying groups have been asking the USDA to step in and make the loan repayments on behalf of the borrower. Of course, this makes what was a loan to a Black (or other minority) farmer a riskless US government security.

The USDA says that obliging the banks would put an undue burden on taxpayers and that the law doesn’t allow the agency to pay interest costs or reimburse secondary market investors. This quote from Bill Bridgeforth, a farmer in Alabama who is on the board of the National Black Growers Council says it all: (brackets by Wrongo)

“Look at the two groups: You have the Black men and women who have gone through racism and discrimination and [some] have lost their land and their livelihood….And then you have the American Bankers Association, which represents the wealthiest folks in the land, and they’re whining about the money they could potentially lose.”

In addition to the banks, a group of white farmers in Wisconsin, Minnesota, South Dakota, and Ohio are suing the USDA, arguing that offering debt relief on the basis of skin color is discriminatory. The lawsuit was filed by a group led by (who else?) the former Trump administration troll Stephen Miller. Miller’s fear of people of color getting anything is at the diseased heart of America’s economic, justice, and social systems.

Investing involves risk, including the risk of losing money. These banks aren’t going to “lose” money. And they’re ignoring the historical injustices visited on these farmers while focusing on their bottom lines. They’re also ignoring that they were an important part of that systemic racism.

This is another example of a huge flaw in our national ethos: The notion that maximizing business profits must always be a primary consideration when formulating government policy, and that enriching shareholders should take precedence over everything else.

The banks protesting debt relief for Black farmers says plenty about their sense of entitlement, particularly when their profits are soaring. It’s more proof that we need revolutionary change to American capitalism.