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) 📕

an investigator from the SBA’s OIG. Under the False Claims Act, it is standard protocol for them to meet with the “relators,” as the whistle-blowers are called. They met with Brickman a few weeks later. After some basic questions about me (they wanted my resume), what we do at Greenlight and our relationship with Brickman, I walked them through our problems with Allied and the company’s long campaign of attacking us. I gave them the whole history. The meeting lasted for about an hour and a half.

A month after our meeting, our lawyer heard from the Justice Department lawyers, who, after consulting with the SBA, were under the misimpression that the entire loss from BLX across the entire program was only $3 million! That figure made no sense—it should have been in the tens or even hundreds of millions of dollars. The Kroll report alone found more fraud than that, and those were only a small percentage of the company’s loans. The fraud was certainly more prevalent and damaging to taxpayers than $3 million. Dissatisfied with this figure, Brickman found out the losses. It took him a while, but paperwork, government bureaucracy, and time have never hindered him. He filed a series of Freedom of Information Act (FOIA) requests to the SBA relating to BLX defaults.

Greenlight also filed a few FOIA requests. We asked for access to BLX’s regulatory filings. The SBA denied this request because release of the information “may pose harm to the lender.” In contrast, banks and insurance companies also must make regulatory filings. These filings are public documents. As a result, Greenlight appealed to the SBA and argued, “[We] believe that there is a public interest in releasing this information that outweighs any potential harm to this particular lender, as [we are] investigating whether this lender has committed fraud against the SBA.” The SBA denied our appeal.

In 2003, the SBA had announced that it would create risk-ratings to monitor individual lenders. So now we requested that the SBA release the risk-rating and related analysis for BLX. The SBA denied our access again, for the same reason. It also denied our appeal.

Eventually, the SBA provided Brickman with access to BLX’s loan history. It took him months to get clarifying information. He also found a database of SBA loans at the University of Missouri School of Journalism. We were able to extract the BLX loans and sorted them by year of origination and status. What we found was even beyond what we expected (see Table 23.1).

Table 23.1 Includes Loans Originated by Allied Capital SBLC, BLX Financial Services, Inc. and Business Loan Center

Sixty days after a loan becomes delinquent, the SBA honors its guarantee by “purchasing the guarantee.” The “Purchased Loans” column shows the loans where the SBA did that. The SBA only has to pay on the guaranteed portion, so its actual outlay is generally 75 percent of the purchased loans. After the SBA purchases the guarantee, BLX continues to try to collect on the loan. During that period, the loan is in a limbo status called “liquidation.” When BLX resolves the loan, it remits 75 percent of whatever it recovers after expenses back to the SBA. At that point, the SBA charges-off any remaining balance.

The SBA data showed that in BLX’s oldest loans (1999–2001), the SBA paid up an average of 22.5 percent of the time. The “Outstanding Balance” column shows that from those years 43.9 percent of the loans remained outstanding. The high purchase rate combined with a significant amount of remaining balances suggested that the eventual default rate could eventually reach 30 percent or more. The data showed that in more recent years, there have been fewer defaults, probably because there has been less time for defaults to develop. Since 1998, the SBA has paid out almost $280 million (75 percent of $371 million) in loan guarantees on BLX loans. That’s almost one hundred times more than the Justice Department found or was told by the SBA.

We suspected that the SBA’s inaccurate claim of small losses might have come from the agency’s not regularly charging-off the loans that went bad, but it also might have been someone within the SBA trying to protect BLX. About 75 percent of all the BLX loans where the SBA paid the guarantee had not been charged-off on the agency’s books. The loans instead remained in liquidation. It was up to BLX, not the SBA, to determine when it had completed every effort to collect. Of course, many bankruptcies take time to resolve. It can take years to resolve a complicated disaster like Enron, satisfy all the creditors, and handle all the things needed to reorganize or liquidate a company. However, these SBA loans are much simpler loans to convenience stores, gas stations, car washes, and motels. They are generally backed by a single property and a personal guarantee. When the loans default, it shouldn’t be a long process to foreclose on the property, hold an auction, and pursue the personal guarantee. It’s hard to see why this should normally take more than a year.

The simple matter was that the SBA wasn’t making its lenders charge-off the loans. This allowed the SBA to defer losses on its books—making the entire program look better than it was. Standard government accounting procedures would require the SBA to book its losses when it pays out on the guarantee. The SBA doesn’t report the results of its program on that basis. I suspect if it did, Congress would better see the enormous risk the program creates for taxpayers.

The effect of the SBA’s policy is that unscrupulous operators like BLX can defer losses on their own books for years. As long as BLX claimed it was trying to collect, it accrued annual servicing fees that it would get to eventually deduct from any recovery it passed back to the SBA. Carruthers heard from a former BLX employee that the company would sometimes create an inflated appraisal for the file to justify its carrying