FDIC Probes Further into ShoreBank

The demise of the politically connected ShoreBank has sparked yet another investigation -- one that could spell trouble for FDIC chief Sheila Bair.

The FDIC Inspector General’s office has launched a wide-ranging probe into the failure of Chicago-based ShoreBank earlier this year, including the role played by Bair in prodding Wall Street’s biggest firms, from Goldman Sachs (NYSE:GS) to JPMorgan (NYSE:JPM) to Morgan Stanley (NYSE:MS), in donating tens of millions of dollars to prevent the bank, with close ties to the Obama administration, from failing.

ShoreBank did fail in August, with the FDIC taking over $2.16 billion in faulty assets, including risky investments in urban real estate, from the bank. But the Wall Street money raised during the summer wasn’t returned. Instead, it used by ShoreBank’s management with the approval of the FDIC to form a new bank that will take over some of the bank’s better-performing assets and its deposits under a new name, the Urban Partnership Bank.

Officials on Wall Street have told the FOX Business Network that they felt political pressure from the Obama administration to contribute a total of about $150 million to recapitalize ShoreBank and the new institution. Valerie Jarrett, the president’s senior economic adviser has close ties to the bank, and the president himself has singled out the bank for praise for its community lending and for financing environmentally friendly green jobs. Jarrett has adamantly denied any involvement in the matter.

But now the FDIC’s IG is looking at what, if any, improper political pressure was put on Wall Street executives in trying to bail out ShoreBank, and in funding the Urban Partnership Bank, which could mean big trouble not just for senior administration officials but also for Bair, since she was on the front line in trying to convince top banking executives to cough up the money for the bailout during summer.

The inspector general Jon T. Rymer, made his intentions known in a recent letter to Congressman Spencer Bachus, a Republican from Alabama and the ranking member of the House Financial Services Committee.

Bachus, who has called for a complete investigation of ShoreBank’s funding in the past, said it is “important that we get to the bottom of whether, and to what extent, the Administration pressured Wall Street banks to bailout ShoreBank. This investigation is an important step to obtain answers and ensure the Administration is not creating a new class of institutions that is ‘too politically connected to fail.’’’

Bair had no immediate comment. “We will fully cooperate with this material loss review, just as we have for the over 70 other Congressionally mandated reviews produced by the FDIC IG since 2009,” a spokesman for the FDIC said.

The letter, obtained by FOX Business, will examine among other things, “the nature of the FDIC involvement in the ShoreBank investor recapitalization effort,” and “determine whether there was any indication of political or inappropriate influence imposed on the FDIC.” Rymer, in an interview with FOX Business, said his office plans to question Bair about her role in the matter. “We will speak to her,” he said.

ShoreBank’s failure came after months of political haggling about whether a bank of its size should be bailed out since so many other banks, without ties to the administration, have been allowed to fail since the financial crisis of 2008. At first Bair was pushing for federal bank bailout money to be used to supplement the funds from Wall Street. But that effort failed following a Federal Reserve report that cast doubt on whether the bailout was enough to keep ShoreBank from failing down the road.

FDIC Inspector General's Letter on the ShoreBank Investigation