The Collapse of a Noble Idea

In March 2004, the once-heralded Los Angeles Community Development Bank (LACDB) closed its doors because of insolvency. The government-created bank's demise should come as no surprise. Credit officers at the not-for-profit bank lacked incentives to monitor loans on an ongoing basis. The LACDB's lending was subject to pressures by public officials, which distorted decisions so as to favor politically connected borrowers. Moreover, the bank - like other public lenders - was actively encouraged to fund ill-conceived, high-risk projects. A financial institution with a portfolio of very high-risk loans was bound to fail