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The typical control fraud made ADC loans with the following characteristics. • There was no down payment. • There were substantial up-front points and fees. • All of those points and fees were self-funded: the S&L loaned the buyer the money to pay the S&L the points and fees. • The term of the loan was two or three years. • There was no repayment of principal on the loan prior to maturity. (The loan was interest-only, or nonamortizing.) • The S&L self-funded all of the interest payments. The S&L paid itself the interest when it came due out of an interest reserve. The S&L increased the borrower’s debt by an amount equal to the interest reserve. • The interest rate on the loans was considerably above prime. • The borrower had no personal liability on the debt (the loan was non-recourse). His construction company was indebted, but the developer was not. He did not provide any meaningful personal guarantee of his company’s debt. • The developer pledged the real estate project (the collateral) to secure the loan. • The loan amount equaled the (purported) value of the collateral. • It was common for the borrower to receive at closing a developer’s profit that could represent up to 2 percent of the loan balance. • It was common for borrowers to give S&Ls an equity kicker, an interest in the developer’s net profits on the project. At first, these kickers often exceeded 50 percent. After the accounting profession issued a “notice to practitioners” that said a 50 percent equity kicker was evidence that the transaction was not a true loan, it became common to give a 49 percent interest. (For the characteristics in this list, see NCFIRRE 1993a; Black 1993b; Lowy 1991; O’Shea 1991; Strunk and Case 1988; Mayer 1990; Pizzo, Fricker, and Muolo 1989; Calavita, Pontell, and Tillman 1997.) The implications of these characteristics are not obvious. One has to understand the fraud mechanism, Bank Board regulation, and a bit about accounting to see how elegant a Ponzi the control frauds created. The first implication is that one can see why the S&Ls were taking an equity risk, not making a loan. The real estate developers were not personally liable to repay the loan. Their companies were not really on the hook either: they used shell companies with no assets to sign the note. The developer would not repay the S&L unless the real estate project succeeded. Indeed, it had to succeed fully because the loan was 100 percent of the projected value; the S&L would lose money if the appraiser inflated that value even slightly. These were not close calls: the typical ADC Ponzi loan was clearly an equity investment.
The Best Way to Rob a Bank Is to Own One
William K. Black
Unlike the bottleneck of working memory, long-term memory is a vast reservoir. Yet most of our long-term memories lie inert. We may have the answer to a problem somewhere in memory, but if we can’t recall it at the right time, it might as well not exist. With routine tasks, Kintsch and Ericsson argued, we learn to create retrieval cues that allow us to keep track of more information than the bottleneck normally allows.
Get Better at Anything
Scott Young
It makes no sense, unless you think back to Lawrence’s long march across the desert to Aqaba. It is easier to dress soldiers in bright uniforms and have them march to the sound of a fife-and-drum corps than it is to have them ride six hundred miles through snake-infested desert on the back of camels. It is easier and far more satisfying to retreat and compose yourself after every score—and execute perfectly choreographed plays—than to swarm about, arms flailing, and contest every inch of the basketball court. Underdog strategies are hard.
David and Goliath
Malcolm Gladwell
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