More on Giannoulias's Broadway Bank

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As I predicted, Alexi Giannoulias reacted to the latest bad news about Broadway Bank by issuing a statement noting he hasn't worked at the bank for almost four years and that it's not the only one out there struggling right now. It's the same way he's responded to questions about the bank since the beginning of the Senate campaign.

Meanwhile, one of his rivals, Chicago Urban League president Cheryle Jackson, is calling on Giannoulias to withdraw from the race. "The Giannoulias family’s money has directly bankrolled the state treasurer’s political career and that money has been made off of the backs of working families, small businesses, and taxpayers," she said in a prepared statement. "Giannoulias’s actions have made him unelectable, probably in the primary and certainly in the general. For the sake of Illinois families and for the good of the Democratic Party, I am calling on the treasurer to do the honorable thing and withdraw from this race today."

I don't see him complying with her request, but he will have to say more than he has so far—especially given the consent order [PDF] detailing the steps Broadway agreed to take in response to charges of "unsafe or unsound banking practices and violations of law, rule, or regulation alleged to have been committed in relation to weakness in capital, asset quality and liquidity."

In agreeing to the consent order, Broadway managers did not admit or deny any of these charges.

But they now are obligated to follow its mandates. The order requires Broadway to come up with more capital and get rid of some of its bad assets. To explain why, I'll get wonky for a second. As of September 30, the last time the FDIC posted one of the bank's quarterly reports, more than 14 percent of Broadway's loans were at least three months past due. By my analysis, the figure for several other local banks of comparable size (Amalgamated Bank of Chicago, First Chicago Bank and Trust, National Republic Bank of Chicago) ranged from 2 to 7 percent.

In addition, Broadway's ratio of reserves to these "nonperforming" assets was 20 percent. For the other banks, it ranged from 36 percent to 127 percent. In other words, Broadway had very little money on hand to cover all of these failing loans. Many of them were likely issued while Giannoulias oversaw lending at Broadway from 2004 to 2006.

The order doesn't stop there. Broadway is now required to hire managers "with the qualifications and experience commensurate with his or her duties or responsibilities" who can "restore the bank to a safe and sound condition." Broadway also has to hire an "independent third party" to study the credentials and pay of bank managers and to come up with qualifications for replacements if need be.

It's not clear if this study will go back to the time Giannoulias was at the bank, but that doesn't mean it's not relevant to his candidacy. Giannoulias has told me in interviews that he worked part-time at the bank while he was a student, and he took a job as a loan officer there after finishing law school. Two years later he was a vice president overseeing all of Broadway's lending. Analysts I've spoken to say banks traditionally trained employees for years just to make them loan officers.

Broadway must also revamp its lending policies. "Effective immediately, the bank shall require complete loan documentation, realistic repayment terms and current financial information adequate to support the outstanding indebtedness of each borrower," the order says. If that seems like common sense, it is—but critics have charged that Broadway Bank didn't always follow those rules, including the period when Giannoulias was in charge of lending. That was one of the allegations made by the family of Loren Billings, an elderly woman duped into taking out a loan for some of her tenants that she couldn't keep up with. Her family says she submitted paperwork with incomplete and contradictory information about her earnings, but Giannoulias approved the loan anyway. (A Cook County judge rejected the family's lawsuit against Broadway in 2008 and the case is now in state appellate court.)

So what does this all mean for Giannoulias? It doesn't help him, obviously, but he and his campaign have known all along that something like this might happen, and I'll be shocked if they don't stick to their script: this is unfortunate but it has nothing to do with Alexi and his commitment to helping create jobs for working families.

They're right on the first count but not on the second. He was part of the bank for years, some of the failed loans were the result of his decisions, and he's continued to make money on Broadway dividends.

At the very least, it's a big political problem. It's not the best year for bankers of any sort to be running for office.

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