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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
I’ve told the story of Nate and me to young coaches. It’s funny. It’s entertaining. Everybody gets a kick out of it. Two guys in a basement, pizza boxes strewn all over, imagining game scenarios while scribbling all over whiteboards. It’s the hoops version of that movie A Beautiful Mind. But instead of brilliant mathematical equations, we’re drawing up sideline out-of-bounds plays. But here’s the thing. When I talk about how we made a spreadsheet of all the stuff we put on the dry-erase boards, I get asked by young coaches: Can we have that? They want the work product without doing the work. And I say, no, you’re missing the whole damn point. You have to do it yourself.
Rapture
Nick Nurse and Phil Jackson
As our science and technology develop further, individual achievements may become increasingly rare as distributed groups become necessary to bring together all the knowledge required to solve hard problems. New advances in artificial intelligence may accelerate this trend, as the world of book knowledge becomes increasingly accessible, but the tacit understanding of unspoken practice remains within cloistered communities of experts. Access to the environments where knowledge resides is often a bigger hurdle to mastery than learning itself.
Get Better at Anything
Scott Young
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