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were looking for help. They wanted the regulatory heat from the BLX investigation to go away, but it wasn’t clear why it was bothering them. Though they may have wanted to tell the government what they knew about BLX without getting into trouble themselves, they may have just wanted us to learn what happened. They wanted us to help them get an immunity deal. They also strongly resented Tannenhauser for the way he treated them.

Williams told us he had met with the FBI, SEC, U.S. attorney, SBA, and OIG. It was very unclear to what extent these were substantive meetings. For example, he told us the FBI came to his house to subpoena him. Auerbach only met with the SBA, but the SEC had been present.

Those inquiries started as information gathering, but at some point Williams, and possibly Auerbach, became the targets of the investigation. Williams and Auerbach said they did nothing wrong and had nothing to hide. They asked how they could have been responsible since they had no voting power on the loan-approval committee?

In their minds, BLX and Allied are one and the same—when we questioned them about it, they simply said, “BLX is a subsidiary of Allied”—but they always spoke of “Allied” and not “BLX” at lunch. Williams and Auerbach were surprised to read about Harrington’s indictment. Williams said he had never met Harrington, but talked over the phone during conference calls. Auerbach met him directly because Auerbach’s territory included Michigan. Harrington picked Auerbach up from the airport and drove him to various workout sites. Auerbach described Harrington as a real down-to-earth guy, low key, the nicest guy in the world. He spoke of how Harrington “talked about the Bible.” Basically, Auerbach didn’t think Harrington could have done all the things of which he was accused. Both Williams and Auerbach said that relative to other people at the Detroit office, Harrington was the nice guy.

They described CEO Tannenhauser as having a “Napoleon complex.” “Credit approval meetings were jokes,” Auerbach said. No one disagreed with Tannenhauser. Tannenhauser would start by saying how much he liked the borrower’s business, cash flows, financials, and the like, and how he thought BLX should lend the money no matter how speculative or bad the idea. He would go around the room and ask for opinions. Auerbach could only recall one person, Len Rudolph, who ever disagreed with Tannenhauser, which Auerbach remembered only happening in a single instance. “Tannenhauser approved everything unless it was truly insane,” Williams told us.

Williams read about some of the problem loans Greenlight had found. He thought those weren’t even the worst ones. “Some of the loans, you just had to laugh,” Auerbach said. The loan originators held all the power and influence at BLX. “Anybody in originations was a God,” Auerbach told us. This wasn’t the case in all the offices, but was true in many of the offices that employed their own underwriters. The underwriters were in a junior position to the originators and to office management. This put them in a bad position: If they rejected loans, it would hurt their bosses’ bonus. Never a good move.

Although there was a list of approved appraisers, the workout team had its own blacklist of appraisers they would not use because of “bad appraisals.” Those appraisers were used for originations. Tannenhauser would literally throw appraisal documents at people in meetings when he was unhappy with the workout valuations. Tannenhauser blamed the workout team for the large discrepancies between the collateral valuations when the loan was underwritten and when it was in workout. In Tannenhauser’s mind, it was always the workout valuations that were wrong and never the original valuations used to underwrite the loans.

Williams and Auerbach never understood why the original valuations were so high. In many cases, the description of the assets in the original appraisal did not match the description of the assets in the workout. It would be as if the appraisal were for a Bentley, but when they picked it up, it was a Hyundai. Tannenhauser would argue that if the original appraisal were for $1 million and the workout appraisal came in at only $300,000 eight months later, it was the workout person’s fault. Of course, the very rapid default gave a good indication which appraisal was wrong.

Then, they told us about some of the loans: There was a ridiculous USDA loan for about $4 million to build a “butterfly pavilion” in “the middle of nowhere” deep in rural South Carolina. Another loan was to Ashburn Hospitality, a hotel converted into rented rooms. The loan went bad. The owner collected rent, and then at 3 a.m. slipped foreclosure notices under people’s doors saying they had to leave that morning. The residents completely trashed the place. Williams and a realtor inspected the property and found a box labeled “mortal remains” in one room and a large rattlesnake in another.

They said the Bill Russell Oil property was similar to a movie set’s false-front building. They confirmed most of the general view of the USDA audit and joked about the $3,000 shack, where the appraisal cost more than the value of the property.

They discussed the shrimp-boat loans, telling us a Vietnamese broker was involved in loans where BLX would lend $1 million for a boat worth only $80,000. The loan would then go bad, but BLX would simply turn the boat back to the broker “to find another Vietnamese” to take a fresh $1 million loan. BLX just kept making the loans. Auerbach said BLX had the $80,000 appraisals and yet was aware that the broker was finding new borrowers to take new loans based on grossly inflated collateral values so that BLX did not take a loss.

Environmental issues were significant sources of problem loans. Auerbach said many loans did not have environmental problems identified in the original underwriting, but significant problems were found during the workout of the loan—sometimes barely a year later. In some cases, the cost of remediation exceeded the value of the remaining

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