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Did Black Owned Banks Suffer From Racial Discrimination In The TARP Bailout?

|Includes:KBE, Financial Select Sector SPDR ETF (XLF)

Many Americans like to think of the U.S. as a color blind society. We have an African American president after all. State sponsored segregation is now a thing of distant memory in the United States. Yet, some recent, highly-respected academic studies have indicated that racial discrimination may hurt African Americans in economic transactions. One study found that applicants with identical resumes were much more likely to be called back for an interview if they had "white" sounding names than applicants sporting "black" names. Another study found African American cab drivers received 1/3 less money in tips on average than white cab divers.

Yet, these studies point to private citizens' potential prejudices. Before embarking on my most recent study, I would have been skeptical that the federal government with its affirmative action programs would favor non-minority owned businesses over African American owned firms. Unfortunately, that is what my coauthor Lucas Puente ofStanford University and I found in our paper "Racial Discrimination in TARP Investments."

We found that minority and black owned banks were significantly less likely to receive funds from the Troubled Asset Relief Program (TARP) Community Development Capital Initiative (CDCI). A non-minority bank with the median characteristics was approximately ten times more likely to obtain TARP funds than an African American owned bank after controlling for other factors. Thus, healthier black owned banks were much less likely to obtain TARP funds through this program than weaker non-minority owned banks.

This finding makes me really sad. There needs to be more investigation of the investment process in TARP program. We cannot tolerate a government that hands out its funds preferentially to predominantly white owned firms. The TARP bailout was distasteful enough before finding out that the investment process may have been marred by racial prejudice.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I own some index funds that have holdings in some publicly trade banks.

Stocks: XLF, KBE