When California banks merge, their executives know they’ll have to face off with belt-and-suspenders regulators and pinstripe-clad lawyers. But lately, their toughest foil might be Paulina Gonzalez.
She’s the executive director of the California Reinvestment Coalition, an activist group that pushes banks to do more lending in low-income neighborhoods. Her latest target is a big one: She and the coalition are trying to hold up the merger of Pasadena’s OneWest Bank with CIT Bank, a deal that would create L.A. County’s biggest bank.
If the deal goes through, the reconstituted CIT Bank, part of Livingston, N.J., lender CIT Group, would be based in OneWest’s Pasadena offices. With combined assets of $40.8 billion, it would be considerably larger than downtown L.A. lender City National Bank, the current No. 1 with assets of $30.5 billion.
But before that can happen, Gonzalez and the coalition plan to have a say and try to get the banks to commit to policies that would help low-income communities. Gonzalez is coming off a recent success in negotiating a similar plan with Irvine’s Banc of California Inc.
That deal, reached through negotiations that involved former Los Angeles Mayor Antonio Villaraigosa, has given the coalition and Gonzalez a shot of confidence as they take on two much larger institutions.
And one part of her strategy is using Banc of California as an example.
“It can be a real challenge to go up against these powerful banks,” said Gonzalez, a former labor organizer. “But I think the Banc of California agreement really showed everybody what’s possible. It’s a victory and something to hold other banks to. If they can do it, why can’t you?”
Privately, some banking insiders have groused that the coalition and similar groups use their political muscle to hold up bank deals and extract political favors or donations for themselves or affiliated groups, but none was willing to say that on the record. Many banking attorneys declined to comment for this article because they are working on deals the coalition is involved with.
Gordon Bava, a partner at West L.A. law firm Manatt Phelps & Phillips, said the coalition has racked up several wins and that its biggest weapon might be its demonstrated ability to put the brakes on a transaction, which leaves banks susceptible to potential deal-killing swings in the market.
“They’ve generally been very successful in getting concessions from participants in M&A transactions,” Bava said, “primarily because they have the ability to significantly slow down a transaction through the approval process.”
There’s been a wave of bank mergers over the past few years, and the coalition has seized on all that consolidation as an opportunity to push banks to do more lending in low-income communities and make other concessions.
Before banks can merge, they need to get approval from a group of federal agencies as part of the Community Reinvestment Act. These regulatory agencies scrutinize a bank’s history in serving low-income and minority communities as well as small businesses.
The coalition, a non-profit statewide organization based in San Francisco made up of more than 300 local activist groups, has used that law as leverage in negotiating plans that publicly lay out specific community benefits. That’s what the group did with Banc of California after initially opposing its purchase of 20 L.A.-area branches from Puerto Rico’s Popular Community Bank.
Robert Braun, a partner at Century City law firm Jeffer Mangels Butler & Mitchell, said the fact that the coalition came to Banc of California with reasonable requests – such as creating a low-cost checking account – made it not worth the bank’s time and money to fight.
“They asked for things that were realistic,” he said. “They asked for things that the banks can give.”
Gonzalez is following that game plan again, but at this early stage, she said that it’s been an uphill battle in reaching CIT and OneWest’s management. Her first meetings with representatives of the two banks did not go as well as she would have liked.
“We met with them just a couple of weeks ago,” she said. “We were hopeful going into the meeting that we could come to some resolution. We left less hopeful.”
That contrasts with Banc of California, whose chief executive, Steve Sugarman, negotiated with an open mind, Gonzalez said. But the key might have been Villaraigosa, who chairs the bank’s advisory board and has a history with Gonzalez.
Before joining the coalition earlier this year, Gonzalez was the executive director at Strategic Actions for a Just Economy in downtown Los Angeles, where she worked with Villaraigosa on securing a $20 million affordable housing commitment from USC as part of the school’s University Village redevelopment project.
Prior to that, she spent 13 years at hotel and food service workers union Unite Here, where she fought for living-wage ordinances at hotels in Santa Monica and near Los Angeles International Airport.
With Banc of California, she saw Villaraigosa, who has deep ties to the labor movement, as someone with credibility to both sides who could get her message across.
“We said to him, ‘We need your help,’ ” Gonzalez said. “We knew that he was working for the bank, but we also knew he had this history.”
And Villaraigosa was able to connect with both parties. Sugarman confirmed the former mayor’s work in bridging the initial gap between the two sides.
“Villaraigosa spent countless hours facilitating productive discussions with the CRC focusing on the shared belief that our communities should benefit as Banc of California grows,” he said in an email to the Business Journal.
Ultimately, Banc of California agreed to develop a checking account that doesn’t allow debit card transactions to overdraw and has committed to targeting women- and minority-owned businesses for its small-business lending. The bank will also reconfigure its ATMs to waive cash withdrawal fees for families receiving government assistance.
Despite the bank’s initial reluctance to share the details of the plan with its competitors, the coalition fought to make it a public document.
Gonzalez said the plan met all her criteria and allowed her to endorse the merger – and hold up Banc of California as a positive example to a constituency she acknowledges has a deep mistrust of banks.
“We can start talking about the banks that are doing right and have safeguards in place for these communities,” Gonzalez said. “That starts to build a relationship.”
Gonzalez is still waiting for a similar effort from CIT and OneWest.
One tactic that she hopes will incentivize them is getting as many groups as possible to publicly oppose the merger.
“Forty-something organizations from across the state weighed in on Banc of California,” Gonzalez said. “We’ll have that many or more for CIT-OneWest. Regulators can only ignore that so much. So it becomes a very public campaign.”
Jeffer Mangels’ Braun agreed that the public nature of a deal the size of the CIT-OneWest transaction works to the coalition’s advantage and might motivate regulators to scrutinize the deal more closely.
“The CRC is most effective when it has something that’s going to create some waves anyway,” he said. “There are already going to be some questions about this merger. Any time you have a bank that’s this big, it’s going to be something that gets a lot of attention. It’s their Super Bowl ad, so to speak.”
Gonzalez also said OneWest and CIT’s track records ought to make them more inclined to do something for lower-income communities.
OneWest was created from the ruins of failed IndyMac Bank and seeded by billionaire investors including George Soros and Michael Dell. They benefited from an agreement negotiated with the Federal Deposit Insurance Corp. during the depths of the financial crisis in which the agency absorbed much of the losses from IndyMac’s loans. Since then, the original investors have taken out more than $2 billion in dividends – and stand to make nearly that much from sale proceeds. The bank, meanwhile, foreclosed on more than 35,000 homes in California.
CIT received $2.3 billion in federal assistance as part of the Troubled Asset Relief Program but later went bankrupt. As a result, it did not pay back the taxpayer money. Five years and one bull market later, CIT is prepared to pony up $3.4 billion for OneWest.
Still, Gonzalez said neither OneWest nor CIT has been receptive to her arguments. And this time, there’s no mayor there to help.
“We continued to see signs from Banc of California that they were at least willing to have a conversation,” Gonzalez said. “We have not seen those signs from OneWest or CIT. And that’s disappointing, given the history of those two banks and the damage they’ve done in those communities. You’d think there’d be more of a feeling of responsibility.”