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There was even the unwritten but well-understood goal of getting the share price of Finova to $60. Compensation packages were tied to achievement of that share price. Now, it is a basic principle of Accounting 101 that bad loans and their write-downs get in the way of loan-portfolio growth. Finova employees who knew the extraordinary numbers goals and that their compensation packages were tied to those goals soon discovered that the downside to this principle of portfolio growth could be no bonuses at all. The result was that Finova divisions were carrying loans that should have been written down, and in some cases, Finova capitalized expenses related to repossessed property so that the portfolio value would go up despite the clear uncollectibility of the loan. A bad loan is not an asset, but in this world of promises of continued double-digit growth, employees do rationalize. For example, Finova had one loan to finance a time-share RV golf resort in Arkansas. The loan of $800,000 for this tempting Garden of Eden, complete with wheels and sewerage hookups, was made in 1992. By 1995 the loan was in default and the property was worth only $500,000. However, no one wanted to take the hit to the portfolio, so the loan was carried as an asset and then some as the managers capitalized expenses for the golf course and its restaurant. By the time this accounting impropriety was uncovered, the loan was being carried as a $5.5 million asset. As one of the managers I interviewed said, “All of Arkansas isn’t worth $5.5 million.” By 1999 the auditors began to ask questions, and there were other loans, of significantly higher amounts, that had questions, baggage, and problems. Ernst & Young refused to certify the company’s financial statements until it wrote down a $70 million loan to a California computer manufacturer that had gone bad months and possibly years earlier. Shareholder lawsuits filed against the company alleged that the write-down was postponed because bonus and compensation packages that were tied to the share
The Seven Signs of Ethical Collapse
Marianne M. Jennings
One by one, the investors’ interest withdrew—there were simply too many toxic loans on WaMu’s books and too much uncertainty about the scope of the losses. Chase and Citi were the last two to remain in, but when Lehman Brothers filed for bankruptcy on September 15, market conditions worsened significantly and WaMu experienced another $10 billion in deposit withdrawals. It was unlikely that WaMu would survive unless it started borrowing from the Federal Reserve Board’s discount window. However, Fed lending—like FHLB lending—is heavily collateralized, meaning that the more a bank borrows from those sources, the more expensive it becomes for the FDIC to resolve. For that reason, the law prohibits the Fed from lending to a failing institution, and as a matter of courtesy, the Fed typically consults with us before lending to a troubled bank and does so only with our consent. As WaMu continued to hemorrhage deposits, David Bonderman reached out to Fed Governor Kevin Warsh for help. Kevin referred the call to Don Kohn, who had been our primary contact on the WaMu situation. Don and I held a conference call with Bonderman on Saturday, September 20, and I was shocked at the combative way Bonderman pressed Don for access to Fed lending. Don held firm. We told Bonderman that he needed to continue with efforts to sell or recapitalize the bank.
Bull by the Horns
Sheila Bair
A start-up is, in Peter’s definition, “a small group of people that you’ve convinced of a truth that nobody else believes in.” This is a fitting definition of what has assembled here
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