Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New Epilogue (45 page)

Then Senator Kerry asked: “Why was the investigation of BLX initiated?”

“The criminal investigation was actually started back around 2002 by allegations that were made from a number of sources, some of which, I believe, you have statements from that are commonly referred to as short-sellers,” Thorson said. “The SBA did investigate a lot of those issues, but didn’t find that there were enough specifics there to be able to bring a criminal case.” This brought up the depressing memory of how the SBA could not even find its own loan numbers for the many fraudulent loans we brought to its attention. No doubt it would be hard to find “enough specifics there” if they couldn’t even find the loans in question.

Thorson continued, “There were other issues that developed along the way on the non-fraud side of it, which was an issue in ‘02, which suggested that there were problems with loans, and then in 2005, the OIG issued a management advisory report detailing, I think, it was seven loans, in violation of SBA procedures, and material misstatements to the SBA.”

Then Thorson shocked everyone:

Thorson:
“In fact, to their credit, BLX offered to repay one of those loans, but for some reason the SBA sent them an e-mail stating that they were being too hard on themselves and they didn’t need to do that.”

Senator Kerry:
“You’ve got to hit me again with that one.”

Senator Snowe:
“Yeah” (as everyone began to laugh).

Thorson:
“I’m sorry?”

Senator Kerry:
“You’ve got to hit me again with that one. The SBA did what (sic) they wrote them back and said, don’t worry?”

Thorson:
“That’s the information—I would—neither myself nor Mr. Preston were with SBA at that time, but that’s the information I have, yes.”

It was at this point that Senator Kerry got around to asking who had insisted on making the redactions in the OIG report. Thorson said the requests came from the SBA general counsel and from BLX’s attorneys.
BLX’s attorneys?
“We rejected the claims of the company, but I did accept the redactions from the general counsel’s office,” said Thorson.

“In your opinion, are all of the redactions legally supportable?” Kerry asked.

“No, but in fairness to their office, I’m not an attorney,” Thorson answered.

Senator Snowe followed up: “Could you understand why they continued to renew the status of BLX? . . . Reading the report here, it really, truly is mystifying and disconcerting.”

Thorson responded, “It’s really one of the things that we had a hard time with, and I understand the agency’s concern about affecting their business and the argument was made, I believe, by BLX that it would put them out of business.” Apparently, the SBA thought it was more important to keep a fraudulent company in business than to stop it from increasing the SBA’s losses by cutting it off from making new loans.

After a break Tannenhauser testified, and if he had spun any faster, he would have turned to butter. Senator Kerry also lived up to his promise of sparing the SBA and Allied any embarrassment. The Senator smoothly paved the way for Tannenhauser: “Since this story broke, the Committee has taken a very measured approach to the news, asking the questions about the SBA oversight in reaction, but leaving the disciplinary decisions entirely to the SBA, and I think, we refrain from any sort of public bashing sessions. As you know, we’ve never recommended for or against radical calls for BLX to lose its preferred lender status, delegated loan privileges, or to cease BLX’s ability to sell SBA loans on the secondary market.”

As Tannenhauser began to speak, he was visibly nervous—his voice cracked. In his prepared testimony, Tannenhauser argued that BLX is victim, not perpetrator. He claimed it has no financial incentive to condone fraud, and every incentive to avoid it. In one moment, he blamed the government for not finding the fraud sooner, “The Farm Credit Administration reviewed several of these loans going back almost four years with no indication to us of fraud. Obviously, such wrongdoings are difficult to detect.” Then, he attacked the OIG for finding the fraud later, “The OIG report . . . is fundamentally flawed,” is “replete with inaccuracies and inconsistencies.” Obviously, he liked the Farm Credit report, which missed the fraud, better and alleged that the OIG report “paints an inaccurate picture by excluding the Farm Credit Auditors’ ultimate finding and conclusions, which strongly support the SBA’s decision to renew BLX’s PLP status. . . . Unfortunately, I cannot provide more detail, because criminal law prohibits lenders from disseminating the contents of Farm Credit audits.”

In an apple-pie effort to show remorse and concern, Tannenhauser intoned, “I’m personally saddened and disappointed by the misconduct of our former employee. I wish we had become aware of his activities earlier.” Ready to move on, Tannenhauser testified, “BLX is a very different company today than it was when these fraudulent activities began many years ago.”

When the questions began, Senator Kerry continued his sympathetic approach, “Mr. Tannenhauser, [I] appreciate your testimony, and I know that BLX and the SBA both consider themselves, essentially, they’ve been victims of a fraud here, and obviously, you know, you were in the sense that one of your employees took a flier.”

Tannenhauser took the Senator’s pass and ran with it. He blamed Harrington, pointing out that Harrington’s specialty was making loans for gas stations and convenience stores to borrowers of Middle Eastern descent. BLX observed the poor loan performance, which caused it to shut down Harrington’s “operations well before any indication of fraud or wrongdoing came to light.” They did this because “we are in business to make good loans, and the people are giving us loans that don’t perform well, that doesn’t serve us very well, nor the program.”

Trying to distance himself from Harrington, Tannenhauser testified, “BLX is really an amalgamation of four different companies and the Troy office came to us in the merger of one of those companies that we integrated. . . . Mr. Harrington was really the rainmaker for that office.” Tannenhauser made no mention of the inconvenient fact that Harrington and the Troy office had come to BLX from Allied in the merger with Allied Capital Express, which was supervised by Allied’s own COO Sweeney.

Senator Kerry concluded his questions with a final kowtow to Tannenhauser, “We certainly want to acknowledge that . . . if this is sort of a narrow and singular individual kind of event, one hates to see an entire operation diminished as a consequence of that.” Tannenhauser repeated that BLX had changed its ways and also repeated Allied’s rationalization that taxpayers had not lost any money because of the Detroit fraud. Of the almost $77 million of allegedly fraudulent loans, BLX repaid $8 million.

That’s a loss in any book.

Then, Senator Snowe took a turn, and, again, she proved tougher than Kerry on Tannenhauser, pointing out that as far back as June 2003, the SBA’s Sacramento center had “recommended not renewing the preferred lender status for BLX.” In response, Tannenhauser became combative and using a familiar Allied strategy, claimed that anyone with a critical view just didn’t understand the company. He said the Sacramento Center “may have been confused about what the actual benchmarks [for PLP renewal] were.”

Senator Snowe pushed back: “The center’s non-renewal recommendations were based primarily in BLX’s unfavorable purchase and liquidation rates. Other issues which it cited in June of 2003, thirty-five of sixty-five field offices submitted evaluations that did not support renewal, cited problems with BLX’s inactivity, poor performance, measurability process, closures and liquidate [sic] loans.”

Tannenhauser retorted, “Our loss rate is significantly lower than the industry average is. So that’s the real risk to the government, and we’ve maintained that over the ten to fourteen years that we’ve been doing this.” Again, it was easy for BLX to manage the “significantly lower” loss rates by failing to resolve the defaulted loans, but instead leaving them in their special purgatory status of “in liquidation” for years and trying to outrun the problems by growing its portfolio. According to an SBA publication in 1996, rapid portfolio growth can create a misleading picture of loss rates “because most losses on unseasoned loans are unlikely to have occurred.” For this reason, the SBA decided to discontinue using loss rates for performance measurement.

Senator Snowe finished by getting Tannenhauser to pledge to reimburse the government for any loss that occurred. “Absolutely, absolutely,” promised Tannenhauser.

I don’t know whether the senators believed Tannenhauser’s shtick. I know I didn’t, but, then, I’ve never received financial support from him. I give Senator Kerry credit for at least holding a hearing. Nydia Velázquez, Kerry’s counterpart in the House of Representatives and another large Tannenhauser benefactor, didn’t even do that much.

The hearing revealed a rift between inspector general Thorson and SBA administrator Preston. The SBA was embarrassed by missing the fraud in Michigan. With its oversight under scrutiny, the SBA could not risk the exposure of an additional multi-hundred-million-dollar fraud by BLX in the rest of the country that occurred under its watch. To do so, would raise doubts about its oversight over its entire $60 billion portfolio. Two days after the hearing, the Bush Administration resolved the conflict by appointing Thorson to the Treasury Department. The move had the stench of a cover-up. In February 2008, President Bush nominated Carol Dillion Kissal as the new SBA inspector general. She previously worked in the D.C. Department of Transportation and before that as treasurer of Amtrak. “I look forward to working with her,” said Preston.

While trying to find a video link to the Senate hearing on BLX, one of our lawyers stumbled onto a YouTube video that showed the human face of BLX’s fraud. The video ran for more than ten minutes. On it, a haggard-looking gentleman, Muhammad Arif Darr, told of his experience as a BLX borrower. According to Darr, in the video and in later correspondence, BLX recruited him from New York, where he lived with his family, to purchase a motel in North Carolina. The previous owner had operated the motel until mid-2003, when it ceased operations and he abandoned the property. BLX foreclosed and never kept any security person to protect the property and its contents, which resulted in looting. Darr moved away from his family and borrowed $147,000 against his New York condo, money he put into the property to make improvements.

Then, BLX gave him a $341,441 senior conventional loan and a $758,558 junior SBA loan to purchase the property from BLX for $1.1 million. BLX promised to extend an additional $300,000 third lien to fund property improvements and qualify the motel to be branded a “Knight’s Inn.” BLX used a property appraisal that assumed the improvements had been made and the re-branding occurred. According to Darr, the BLX appraisal compared “a functional, operational property” to his property, which was “
closed down, abandoned, broken down, partially boarded up, roofs partially leaking
and missing many hotel fixtures that were stolen.”

According to Darr (and documentation he provided), BLX reneged on the written-promise for the additional $300,000, so he could not complete the needed renovations. As he put it in the video, “This predator-lender, I have appealed to them so many times and just nothing happens to them. They think they have got everything. They have all the influence in the world and nobody can touch them and nobody can do anything.” As a result, the property never got to a good enough condition to operate profitably or become a Knight’s Inn. Darr had spent the last two years working around the clock at the front desk, but was now about to lose the motel. He wrote, “Improvements were all done by my money, as BLX never spent a dime and got the increase in property value by getting me, the borrower, to spend my money on their property. . . . BLX’s plan was to engineer my default to repossess this property and resell to some other minority victim.” He put his story onto YouTube in a desperate appeal for help and to warn others about borrowing from BLX.