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It would appear that a bank could not negotiate a loan on more favorable terms than the deal I was looking at. Yet, something did not make sense.
November 29
In the 1970s, as a vice president in the loan administration department of the San Francisco subsidiary of a major European international bank, I was wearing several hats: Loan Administrator, Commercial Loan Officer, Real Estate Loan Officer, Loan Adjuster.
The president of the bank, a senior international officer of the parent bank, was hoodwinked by a couple of real estate developers at a cocktail party into making an open $250,000 commitment for the financing of a coke coal venture in Kentucky.
The plan was to harvest coal, from a leased coalfield, for sale under contract to the government of the country in which the parent bank was headquartered.
The plan, however, did not work out as proposed, owing to a number of mishaps.
First, heavy rains flooded the field, and prevented the harvesting of the coal. The two entrepreneurs were compelled to buy coal from another operator to meet their commitment.
This coal was dutifully analyzed to ascertain that it met the required quality standard, and then shipped by barge down the Mississippi River to New Orleans, where it was loaded on a ship.
But then the government chemist aboard the ship analyzed the coal, and found it not to be of the quality contracted for, but inferior, and worth only half as much.
The loan went into default, and the president of the subsidiary bank sent me to meet with the entrepreneurs, in their plush Beverly Hills office, to discuss the default.
The two gentlemen could not explain the metamorphosis which had befallen the coal during transit down the river.
What happened, and this is the only possible explanation, is that the barge operator, along the way down river, stopped at a coal station, sold the good quality coal and purchased a substitute of inferior quality at a handsome net profit.
An examination of their personal financial statements, exhibiting over a million dollars net worth for each, revealed the assets to be encumbered and unavailable.
Of the payment for the coal, albeit reduced, no trace could be found. Obviously, the borrowers had absconded with the money.
In the final analysis, the loan was a total loss.
Many invaluable lessons may be learned from this debacle.
Foreign banking is different from American banking. Thus, foreign bankers' experience, however excellent it may be, cannot be translated into American banking experience by "fiat."
Here we find a bank president, who makes a loan commitment over a Martini – if I may be facetious – without even looking if there is an olive in the glass.
The commitment was made to two real estate developers venturing in the coal business, in which, as we shall see, they had little, if any, experience.
This violated a fundamental principle of lending, which demands that a borrower be experienced in the line of business he endeavors to work.
Had the borrowers been experienced, they might have not chosen a rainy season to lease a coalfield. They would have sat on the coal traveling to New Orleans aboard the barge, or hired some guards from an agency like Pinkerton, or purchased a bond ensuring delivery.
Had the banker been experienced in American banking and commerce, he would have demanded that the coal be protected, because the proceeds of its sale constituted the primary, and only, source of repayment.
There was no secondary source of repayment. The banker had failed to analyze the borrowers' financial statements, which, lacking in substance, did not support the credit.
Over his 50-year career in banking, Ugo Nardi worked his way up from a teller to an auditor, lending officer, state bank examiner, and a bank president. He retired in 2000.
