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The bank should have recognized that the borrower's conditions had changed, and so should the conditions of the credit change, accordingly.
January 3 -
Special credits, like accounts receivable financing lines, real estate construction loans or import-export lines, require experienced personnel because, while they may be quite profitable, they are inherently hazardous.
December 24 -
The credit might have been "gold-gilded," but it did not make sense, the first test that a credit must pass.
December 18
In the 1970s, as a vice president in the Loan Administration office 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 and loan adjuster.
The fairly new bank had no construction loan department, and had never made a construction loan before, and the president of the bank, who was a senior officer of the parent company, had no idea of how complex or how involved a construction loan could be.
Nonetheless, the president, seeking loan portfolio diversification, made a commitment for the construction financing of a resort hotel.
The principal was a Hollywood motion pictures producer with grand ideas, but no real estate development experience.
The commitment was expressed in general terms contained in a letter, a copy of which was delivered to me with instruction to implement.
After reading the letter, the first thing I did was to rush over to the bank counsel, show him the letter and ask if the commitment could be broken.
The lawyer shook his head, and told me that the commitment was so vague that it was impossible to break.
Since the bank had no forms to implement a construction loan, I asked the correspondent bank to let me have a set of their construction loan documents, on which I whited out the bank's name and typed-in the name of my bank. Then I went to work.
The first thing I saw in the lot book reports was that the construction was to be developed over three parcels of land: one owned and the second leased by the developer, and the third neither owned nor leased by the developer.
Consequently, the developer had to negotiate either a purchase or a lease of the third parcel. The owner of which, realizing that he had the developer in a precarious situation, to put it mildly, exacted a heavy cash premium to agree to a lease. To make matters worse, a silent partner withdrew from the partnership, and, with him, his capital contribution.
In effect, the developer had to start with impaired capital.
The development started just before the advent of the rainy season, during which construction stopped, but expenses continued to accrue.
Upon completion of the project, there was no money left to purchase furniture for the hotel and equipment for the restaurant. In essence, the project status was that of a proverbial "white elephant."
In the meantime, another international officer of the parent company was appointed president of the bank.
The developer asked the bank for an additional advance to purchase the necessary furniture and equipment to start operations, but, when the new president refused, he had to get the money from a finance company at a high rate of interest.
Finally, the resort opened, but the loan, under the strain of the financial obligations accumulated for the development of the project, soon became a problem, which the bank could not get rid of: The commitment letter contained no provision for a take-out commitment, and none had been provided.
There is no point in reciting all the errors of principles and procedure afflicting this credit.
It is immediately obvious that this was a unique case of vanity and all-pervasive incompetence on the part of both the banker and the movie producer turned real estate developer.
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.
