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) 📕

value and then hold the defaulted asset indefinitely, sometimes leasing it for “rental income” instead of liquidating it. Worse, Brickman found loans where the borrower filed and exited bankruptcy and even though the SBA debt was discharged, the loans remained classified as “in liquidation” rather than charged-off. It is hard to see how either the SBA or BLX was following its respective accounting rules.

By leaving the defaulted loans in the purgatory status of “liquidation” indefinitely, BLX was able to claim it had a low “loss rate,” which it touted to regulators, the securitization market, and investors as evidence that its portfolio performed adequately (recall that BLX claimed to have less than a 1 percent average annual loss rate). BLX also structured its securitizations to permit it to repurchase defaulted loans out of the collateral pool, reducing the reported losses in the pools, but leaving the defaulted loans on BLX’s books. Not only that, but on the few loans that it did charge-off, BLX had a relatively high recovery rate. This could easily have been a voluntary decision by the company, where loans with a good recovery were posted and resolved, while those with little chance of recovery lingered. Some of the good recoveries may have come by engineering property sales to new buyers financed by fresh loans.

The SBA measures success by how many loans it originates, how many businesses it helps. Every year it puts out a press release proclaiming the amount of support it provides. The SBA also is often criticized when it doesn’t make enough loans fast enough, such as after Hurricane Katrina. I believe the SBA took a “lender-friendly” attitude toward BLX because the company, by pumping out the loans, was making the agency look good. It also didn’t hurt that Allied, BLX and/or their high-priced lawyers aggressively lobbied the agency to ignore complaints from profit-motivated short-sellers, as we heard repeatedly from many regulators.

When we demonstrated that the losses far exceeded $3 million, the Justice Department continued its investigation into our qui tam complaint. The department has ninety days to decide if it will intervene, but it commonly asks for extensions, which it did with us several times in order to complete its investigation. We could have rejected their request, but that would mean we would have to pursue the case on our own. So we gave them more time.

After Brickman tabulated the SBA data on BLX’s loan performance, he sent a second letter to Janet Tasker, the SBA lender oversight administrator, in December. The SBA set benchmarks for the maximum amount of delinquent loans (11 percent), defaults (9 percent), and loans in liquidation (7 percent) that a lender could have to remain in the program. Brickman estimated, using SBA’s definitions and methods, that the delinquency rate exceeded 17 percent, the default rate exceeded 13 percent (and could be closer to 17 percent under some assumptions) and the liquidation rate also exceeded 13 percent.

BLX was far worse than other SBA-backed lenders. Brickman calculated that about 13 percent of the SBA’s guarantee payments on defaulted loans nationwide were on BLX loans in 2004, despite BLX having less than a 4 percent share of national originations. Nonetheless, the SBA, again, renewed BLX as a preferred lender at the end of 2005. We passed the data showing BLX’s astronomical default rate to Jesse Eisinger at The Wall Street Journal. He wrote about it on December 28, 2005. Eisinger reported that Allied said that Brickman’s numbers were “wrong.” However, they weren’t materially different from Allied’s figures, which showed a default rate of 11.25 percent, a level still far in excess of the SBA’s 9 percent limit, even though the rate was depressed by including many recently originated loans that hadn’t had much time to default.

Eisinger reported that the SBA renewed BLX as a preferred lender by excluding the loans originated by Allied Capital Express, supposedly because Allied, rather than BLX, originated them. The agency also excluded the shrimp-boat loans, supposedly due to an industry-wide slump. As Eisinger put it in his article, “BLX also worked the refs, and the SBA kindly moved the goal post closer.”

I went to Atlanta in March 2006 and further discussed the shrimp-boat fraud with a larger group of Justice Department lawyers. (Brickman, again, went down separately in May.) The SBA also sat in on the meeting. I once again needed to explain who I was, what Greenlight was, and how BLX defrauded the SBA.

At the meeting, the investigator for the SBA’s OIG, Kevin Kupperbusch, asked me how we obtained so much detail on the shrimp-boat loans. He asked if we had the loan records. “No, we don’t have the loan files,” I said. The detailed information came from a variety of other sources. “You have to match stuff up,” I said, explaining that they needed to sit down and match up the loans to our allegations of specific lending violations. Our suit contained a laundry list of ways BLX flouted SBA rules: fraudulent appraisals, not properly collecting on the loans, making multiple loans to one borrower, not verifying the equity injections, and so forth. We included a disclosure statement with all this information when we filed the lawsuit, so the government had it. They just didn’t have it in the room we were sitting in.

As for the lack of a certificate from the National Marine Fisheries Service, Kupperbusch speculated that it might not be a problem, because he thought that the SBA decided in 1998 that a certificate was no longer required for a loan. Though the SBA’s standard operating procedure specifically required the letter, Kupperbusch implausibly suggested that, perhaps, the error was that no one bothered to change the regulation on the books.

Of course, BLX had been by far the largest originator of SBA shrimp-boat loans since that time. I wondered whether this might be just another SBA stonewall. Afterward, Brickman sent a FOIA request to the SBA asking for any records indicating the agency had changed the rule. The SBA’s response was