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) 📖

When the questions began, Senator Kerry continued his sympathetic approach, “Mr. Tannenhauser, [I] appreciate your testimony, and I know that BLX and the SBA both consider themselves, essentially, they’ve been victims of a fraud here, and obviously, you know, you were in the sense that one of your employees took a flier.”

Tannenhauser took the Senator’s pass and ran with it. He blamed Harrington, pointing out that Harrington’s specialty was making loans for gas stations and convenience stores to borrowers of Middle Eastern descent. BLX observed the poor loan performance, which caused it to shut down Harrington’s “operations well before any indication of fraud or wrongdoing came to light.” They did this because “we are in business to make good loans, and the people are giving us loans that don’t perform well, that doesn’t serve us very well, nor the program.”

Trying to distance himself from Harrington, Tannenhauser testified, “BLX is really an amalgamation of four different companies and the Troy office came to us in the merger of one of those companies that we integrated. . . . Mr. Harrington was really the rainmaker for that office.” Tannenhauser made no mention of the inconvenient fact that Harrington and the Troy office had come to BLX from Allied in the merger with Allied Capital Express, which was supervised by Allied’s own COO Sweeney.

Senator Kerry concluded his questions with a final kowtow to Tannenhauser, “We certainly want to acknowledge that . . . if this is sort of a narrow and singular individual kind of event, one hates to see an entire operation diminished as a consequence of that.” Tannenhauser repeated that BLX had changed its ways and also repeated Allied’s rationalization that taxpayers had not lost any money because of the Detroit fraud. Of the almost $77 million of allegedly fraudulent loans, BLX repaid $8 million.

That’s a loss in any book.

Then, Senator Snowe took a turn, and, again, she proved tougher than Kerry on Tannenhauser, pointing out that as far back as June 2003, the SBA’s Sacramento center had “recommended not renewing the preferred lender status for BLX.” In response, Tannenhauser became combative and using a familiar Allied strategy, claimed that anyone with a critical view just didn’t understand the company. He said the Sacramento Center “may have been confused about what the actual benchmarks [for PLP renewal] were.”

Senator Snowe pushed back: “The center’s non-renewal recommendations were based primarily in BLX’s unfavorable purchase and liquidation rates. Other issues which it cited in June of 2003, thirty-five of sixty-five field offices submitted evaluations that did not support renewal, cited problems with BLX’s inactivity, poor performance, measurability process, closures and liquidate [sic] loans.”

Tannenhauser retorted, “Our loss rate is significantly lower than the industry average is. So that’s the real risk to the government, and we’ve maintained that over the ten to fourteen years that we’ve been doing this.” Again, it was easy for BLX to manage the “significantly lower” loss rates by failing to resolve the defaulted loans, but instead leaving them in their special purgatory status of “in liquidation” for years and trying to outrun the problems by growing its portfolio. According to an SBA publication in 1996, rapid portfolio growth can create a misleading picture of loss rates “because most losses on unseasoned loans are unlikely to have occurred.” For this reason, the SBA decided to discontinue using loss rates for performance measurement.

Senator Snowe finished by getting Tannenhauser to pledge to reimburse the government for any loss that occurred. “Absolutely, absolutely,” promised Tannenhauser.

I don’t know whether the senators believed Tannenhauser’s shtick. I know I didn’t, but, then, I’ve never received financial support from him. I give Senator Kerry credit for at least holding a hearing. Nydia Velázquez, Kerry’s counterpart in the House of Representatives and another large Tannenhauser benefactor, didn’t even do that much.

The hearing revealed a rift between inspector general Thorson and SBA administrator Preston. The SBA was embarrassed by missing the fraud in Michigan. With its oversight under scrutiny, the SBA could not risk the exposure of an additional multi-hundred-million-dollar fraud by BLX in the rest of the country that occurred under its watch. To do so, would raise doubts about its oversight over its entire $60 billion portfolio. Two days after the hearing, the Bush Administration resolved the conflict by appointing Thorson to the Treasury Department. The move had the stench of a cover-up. In February 2008, President Bush nominated Carol Dillion Kissal as the new SBA inspector general. She previously worked in the D.C. Department of Transportation and before that as treasurer of Amtrak. “I look forward to working with her,” said Preston.

While trying to find a video link to the Senate hearing on BLX, one of our lawyers stumbled onto a YouTube video that showed the human face of BLX’s fraud. The video ran for more than ten minutes. On it, a haggard-looking gentleman, Muhammad Arif Darr, told of his experience as a BLX borrower. According to Darr, in the video and in later correspondence, BLX recruited him from New York, where he lived with his family, to purchase a motel in North Carolina. The previous owner had operated the motel until mid-2003, when it ceased operations and he abandoned the property. BLX foreclosed and never kept any security person to protect the property and its contents, which resulted in looting. Darr moved away from his family and borrowed $147,000 against his New York condo, money he put into the property to make improvements.

Then, BLX gave him a $341,441 senior conventional loan and a $758,558 junior SBA loan to purchase the property from BLX for $1.1 million. BLX promised to extend an additional $300,000 third lien to fund property improvements and qualify the motel to be branded a “Knight’s Inn.” BLX used a property appraisal that assumed the improvements had been made and the re-branding occurred. According to