Are Small Banks America's Next Cash Crop?

William Spademan is a radical banker. In an era when Wall Street executives frequent talk shows to defend lavish bonuses "earned" through reckless speculation, Spademan has been working to create a new kind of bank that would empower communities instead of enriching a powerful few.

"If you give any community the ability to create and control money, [it] can decide for itself what to invest in--[and] what needs to be done," Spademan says.

After spending decades in the nonprofit world, Spademan found himself reluctantly turning to the realm of banking in an effort to mitigate economic inequality and assuage poverty.

"I was kind of repulsed by the whole idea of economics and money," Spademan says. His new banking model is informed by years of community activism. Spademan founded the Center for Peace and Justice in Brunswick, Maine, in the late 1980s and continues to operate a group that provides financial support to nonprofit organizations.

For six years, he has been working to develop a new type of financial institution he calls a Common Good Bank. Spademan's bank combines two common financial structures--a credit union and a public bank corporation--directing the community focus of the former and the profit potential of the latter toward the good of society. It's an ambitious idea that would give communities democratic control over the creation of money and its distribution--restoring public accountability in the financial system, and funding important public projects that have been ignored by Wall Street financiers.

Large banks today tend to be public companies with stockholders spread all over the globe, especially on Wall Street. The short-term interests of these shareholders are rarely attuned to the well-being of the communities where banks operate.

West Coast financial behemoth Wells Fargo, for instance, has long been considered one of the strongest banks in the world for investors. But its stock price benefited significantly from the billions of dollars the bank raked in from the subprime mortgage boom. Wells Fargo's executives sold these toxic loans off to investors immediately after they had been extended to borrowers, so the bank's books have stayed clean, even though many of the communities it serves have been devastated. In April 2007, the banking giant paid $6.8 million to settle a class-action lawsuit filed against the company for predatory subprime mortgage lending in California.

It became common for corporate banks to pursue high-risk ventures to turn high profits, despite the fact that it is astonishingly easy to make money in the banking business. Before risky lending was the norm, banking"used to be called the three-six-three business model," according to Lawrence J. White, a senior bank regulatory official during the late 1980s. "You borrow money at 3 percent, you lend it out at 6 percent, and you"re on the golf course by 3 p.m.," says White.

Shareholders on Wall Street do not need a bank to make long-term profits; they only need it to garner high returns in the short term. When the stock starts to fall, these speculators can simply sell and move on to other stocks. The pressure on bankers to engage in risky behavior is high, and many banks link executive compensation to the company's stock price, rewarding short-term gains and sacrificing long-term stability.

"We saw what was going on in the industry in the last few years," says Curtis Hage, CEO of Home Federal Bank, a community bank based in Sioux Falls, South Dakota, that specializes in mortgage lending. "It was just intolerable to us."

Hage is no radical. In my half-hour conversation with him, he used the word "conservative" approvingly a total of 22 times. He wasn't referring to theories of international relations; he was talking about straightforward aversion to risk. He never raises his voice. He wears plaid ties. He has never approved a subprime mortgage or a blockbuster merger, and all of his bank's loans are made either in the Sioux Falls area or to people with whom the bank has previously worked. Hage believes the best way to make money is to be responsive to community needs. "If we make a loan to a borrower who can't afford it, we've done no service to them, and we've created no value" Hage says.