Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New David Einhorn (best classic books of all time .TXT) 📖

In classic bureaucratic fashion, the agency’s defense against its critics has been to go on the offensive, and critics have watched in dismay as the SBA has entrenched itself by expanding both the size of its portfolio and the scope of its services.

In the 1990s, the SBA created new lending programs called SBAExpress and Community Express. These programs provide government guarantees on smaller loans with reduced application paperwork. According to the SBA Web site, “SBAExpress was established by the SBA to test the implications of delegating additional authority to selected SBA lenders and of streamlining and expediting the Agency’s loan approval process.” Under the program, the SBA allowed lenders to process loans under $250,000 with even less supervision from the agency. It’s easy to imagine the results of this policy.

Just as with the 7(a) loans, the new policy of further “streamlining” and “expediting” SBA loan guarantees led to widespread fraud and corruption. A report in December 2006 by the SBA’s OIG found that of the forty-five defaulted loans it audited in the Community Express and SBAExpress programs, forty-four were improper. “Our audit disclosed that SBA purchased SBAExpress and Community Express loans without obtaining information needed to assess whether lenders verified borrowers’ use of loan proceeds, determined eligibility and creditworthiness, or verified borrower financial information. . .” the audit report said. “Based on the high rate of deficiencies, we estimate that $128 million to $130.6 million in disbursements on the 2,729 loans approved after January 1, 2000, and purchased before February 1, 2005, were not properly reviewed by SBA.”

It should come as no surprise, of course, that BLX became an eager participant in the SBAExpress and Community Express programs. In 2005, The Miami Herald described BLX as a “specialist” in Community Express loans, having issued more than $26 million in loans the prior year—more than double its budget. “We haven’t pushed [our services] that hard in South Florida because of the hurricanes—so we’re really just getting started,” said Fred Crispen, executive vice president of BLX.

We also offered Wheeler several recommendations for Congress to make to the SBA in order to combat fraud in its loan programs:

The SBA should reinvest a portion of the savings it achieves from delegating underwriting authority to private industry in better oversight.

SBA audits should focus on measuring the quality of lenders’ underwriting decisions, instead of filling out “check-the-box” questionnaires and studying loan files for “completeness.”

The SBA should recognize losses when losses occur, instead of waiting for the final resolution of the loan before recognizing losses.

The SBA should develop objective criteria that lenders must satisfy in order to participate in SBA’s loan programs.

The SBA should make public much more information about its lender performance, including the SBA’s lender risk ratings and regulatory filings.

The newer Section 7(a) loan programs, such as SBAExpress and Community Express, should be eliminated because they receive even less oversight and are rife with abuse.

Wheeler had already spent time reviewing the BLX situation after Harrington was indicted. She was familiar with Allied’s version of the story that a single rogue employee caused the fraud, that BLX was the victim and so forth. At one point, she even asked me whether I had a personal relationship with anyone at the SBA’s OIG. I replied, “I know you are asking this because Allied has been telling people that I am personal friends with the SBA OIG in Michigan.” She nodded. I was surprised that Allied had extended this fiction to the Senate staff. I told her the answer is “No,” and that I didn’t even know the name of the Michigan SBA OIG.

Brickman and I said we would be willing to testify, if asked. Wheeler asked who should testify from BLX. I suggested Tannenhauser. She said he might not be available (this meeting came a week before Allied announced it had replaced Tannenhauser) and BLX had suggested Deryl Schuster. She continued by saying, “We have heard enough from Schuster.” He was the BLX executive quoted encouraging the SBA lending industry to raise money for Senator Kerry’s presidential bid, while trumpeting Tannenhauser’s membership on Kerry’s fundraising committee.

On November 7, 2007, Senator Kerry announced there would be a hearing the following week to press for more oversight of small business lenders. With the announcement, we learned that Tannenhauser would testify, after all. Brickman and I were offered the opportunity to submit written testimony (which we did) as part of the hearing record, but were not invited to testify in person. Senator Kerry’s office told our counsel the Senator had promised SBA officials that they would not face an “investigative hearing,” pledging it would not turn into a game of “gotcha.”

Senator Kerry repeated this promise at the opening of the hearing, “So the purpose of this hearing is not politics, the purpose of this hearing is not ‘gotcha,’ the purpose of this hearing is to figure out how, with the help of the SBA’s Office of Inspector General, which was created in order to have transparency and accountability and effectiveness, how the SBA’s lending partners and our committee can improve the agency’s lender oversight and prevent fraud in the SBA’s small business lending programs.

“No one is here to suggest that this is somehow pervasive or that it’s more. We don’t know that. We are here to explore the one situation that we know, and those things that have been talked about by the Inspector General over a course of time.”

Senator Kerry, sounding like he was almost apologizing to BLX, adopted a deferential tone toward the company throughout the hearing. He referred to the fraud as being caused by “a bad actor and small groups of people.” He added, “The hearing is not intended to hurt Business Loan Express or any other entity. But that’s not to say also that there isn’t a legitimate standard of accountability because people need to answer for their employees. That’s just a normal course of business, and this should be no different.

“We need to understand how no one noticed or reported a