Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New by David Einhorn (tohfa e dulha read online TXT) 📕

As we laid out a number of fraudulent transactions, they seemed drowsy.

“Do you have the SBA loan numbers for these loans?” one of them asked.

“No, we don’t,” Ferguson said. BLX’s delinquency report was not indexed by SBA loan number. The legal records supporting Kroll’s research didn’t contain them either.

One of them asked, “Do you know how we could get those?”

Was the SBA really asking outsiders how to obtain its own loan numbers? Apparently, giving them the borrower’s name and address wouldn’t do.

I wanted to scream, “Send them a subpoena!” Instead, I said, “Why don’t you ask BLX?”

Ferguson walked through the loan frauds and pointed out the lack of equity injections. One of the SBA guys said, “We see this all the time; what is special about these?” It was as if they were well aware that no one actually follows the rules.

This wasn’t a group of government investigators likely to work overtime. The meeting’s high point was when they bragged they actually recovered about $5 million from Allied for bad loans earlier that year. Obviously, that was news. I had no way to know that half a year later this nugget would resurface.

I was naïve enough to expect that the SBA would actually take an interest. Here, we had spent private resources and laid out an easy road map to show an ongoing fraud that was costing taxpayers at least tens of millions of dollars in guarantee payments on loans that should never have been made and served no purpose other than to line the pockets of crooks. The SBA has limited resources; we were offering free help and were obviously willing to provide additional help, if asked. Most perplexing—the folks we were meeting with had presumably chosen careers in public service to root out exactly this sort of misconduct, yet seemed unwilling to do anything to stop it.

Ferguson told them that he had a list of sources that could help them in their investigation. We suggested that someone from the SBA follow up by calling Ferguson to obtain the list. No one ever did.

Ferguson followed up with one of the SBA officials. He learned that the SBA agreed with Kroll’s assessment of the Mangu Patel loans. In April 2004, Ferguson sent us this update of one conversation with an SBA official:

The OIG [Office of Inspector General] has had difficulty obtaining internal SBA computer records on all the loans listed in BLX’s Delinquent Loan Report dated August 8, 2001.

The loans in the 113-page BLX document did not have SBA loan numbers attached to them and it became impossible for the OIG to find them in the SBA computer database. Then the SBA discovered that the database for August 2001 was no longer available.

Recently a former SBA loan officer has been hired by the OIG to investigate the status of BLX delinquent loans. That person has begun two different investigations of BLX loan records, the SBA source said.

She is looking at the current status of BLX loans to assess whether or not the SBA is being properly notified of the loan status once it becomes delinquent.

In addition, the same person is looking at all the loans in the BLX August 2001 Delinquency Report to determine what the SBA was told about their status and when.

One of the early findings by the SBA is that proceeds of the delinquent loans were improperly used. “We are finding a lot of problems,” the SBA source said.

At this stage, there is only one OIG staff member investigating the BLX loan portfolio status because of a shortage of personnel.

Putting a person on it and finding a lot of problems was a good sign. Perhaps the SBA was slow—a turtle to our hare—but would get there eventually. However, if the investigators were having trouble with the SBA loan numbers and that particular delinquency report, why didn’t they call BLX and ask it to send over every monthly delinquency report for the past couple of years? And further, ask BLX to index the reports to the SBA loan numbers?

The lack of resources was not a trivial concern. The SBA is more than fifty years old. It was created during the Eisenhower administration with the passage of the Small Business Act in 1953. Its goal is to help small businesses compete.

Under the SBA, loans would come from private lenders, not directly from the government. Instead, the government acts as the loan guarantor. It charges a guarantee fee on each loan, which it uses to pay the majority of the losses on the loans that default. However, if the losses run in excess of the guarantee pool, taxpayers are on the hook.

The SBA 7(a) lending program is the SBA’s largest business loan program. At the onset of the program, SBA rules required it to approve every loan before it was issued. In an effort to speed things up, the agency created the Preferred Lender Program (PLP) in 1984 to delegate much of the SBA’s decision-making authority regarding loan approval, loan servicing, and liquidation activity to lenders who have demonstrated thorough knowledge of the requirements. In 2003, the 7(a) program guaranteed $10 billion of loans to 60,000 businesses.

While the PLP made the lending process quicker, more efficient, and less costly to the taxpayer, the government, in effect, turned over its underwriting pen to private enterprise. One would think that the SBA would dedicate some of the resources it saved by not having to review every loan to ensure it doesn’t get ripped-off. Not so.

The majority of the 7(a) loans are made in the PLP. As part of its oversight function, Congress had asked the United States General Accountability Office (GAO) to evaluate the SBA’s lender oversight. In December 2002, the GAO reported that the SBA contracts with outside firms (inappropriately paid for by the lenders being reviewed) to evaluate the PLP lenders. The GAO found that the evaluations do not make a qualitative assessment of the lenders’ decisions but, rather, are only a cursory review of lenders’ processes and documentation maintained