Shell Game
Page 1
SHELL GAME
Inspired by Actual Events
Joseph Badal
This is a work of fiction. Names, characters, organizations, places, events, and incidents are either products of the author’s imagination or are used fictitiously.
Text copyright © 2012 by Joseph Badal
Previously published by Suspense Magazine
All rights reserved.
No part of this book may be reproduced, or stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without express written permission of the publisher.
Published by AmazonEncore, Seattle
www.apub.com
Amazon, the Amazon logo, and AmazonEncore are trademarks of Amazon.com, Inc., or its affiliates.
eISBN: 9781477870570
This title was previously published by Suspense Magazine; this version has been reproduced from Suspense Magazine archive files.
BOOKS BY JOSEPH BADAL
The Pythagorean Solution
Evil Deeds (Bob Danforth Series, #1)
Terror Cell (Bob Danforth Series, #2)
The Nostradamus Secret (Bob Danforth Series #3)
DEDICATION
“Shell Game” is dedicated to my son, Robert, who has been a great source of pride to me in all his endeavors and accomplishments.
ACKNOWLEDGEMENTS
My gratitude and thanks go to my friend, Byron Matthews, a serious student of the recent financial markets meltdown, who cajoled me to write this story and who suggested a number of changes that improved the content and flow of the book.
My thanks, as always, to my agent, Maureen Walters, Curtis-Brown, Ltd., who has given freely of her advice and support.
I appreciate the help provided by my friend, Lewis Campbell, who reviewed the manuscript for legal accuracy. He made a real difference.
Many thanks to John & Shannon Raab for their assistance and encouragement.
I want to acknowledge the bankers and business owners who suffer from arbitrary rules set down by Federal regulators who were asleep at the switch when capital markets were operating out of control, and who now have over-reacted and are taking past errors out on community banks and their clients all over the United States.
Finally, I want to thank my many readers for their support and encouragement. You stimulate me to continue writing. Your feedback makes a difference.
PRAISE FOR JOSEPH BADAL
“Banking has never seemed so dirty as it does in “Shell Game,” the pulse-pounding new thriller from Joseph Badal. The author brings a lifetime of business experience to this tale, which shows how banking regulations can ruin lives and how a villain can manipulate such rules for his own gain. Don’t miss it!”
—Steve Brewer, author of “Lost Vegas”
“Yes, He Can! Once again Joseph Badal has proved himself a thriller author above the ordinary cut. Some may think it impossible to write a convincing (and exciting) novel about the recent bank implosions and real estate market collapse, but Joe has both the chops in investment banking and the narrative skill of a polished suspense author to pull off this difficult feat.
“It’s a high dive for anyone to try, but Joe Badal scores a “10” with this judge.”
—Rob Kresge, author of the Warbonnet historical mysteries and former CIA senior analyst
“Another tightly plotted, deftly executed page turner from a master of suspense and international intrigue. Joseph Badal writes timely stories with authority and compassion. Highly recommended.”
—Sheldon Siegel, New York Times bestselling author of “Perfect Alibi”
CONTENTS
AUTHOR’S HISTORICAL NOTE
PROLOGUE
CHAPTER ONE
CHAPTER TWO
CHAPTER THREE
CHAPTER FOUR
CHAPTER FIVE
CHAPTER SIX
CHAPTER SEVEN
CHAPTER EIGHT
CHAPTER NINE
CHAPTER TEN
CHAPTER ELEVEN
CHAPTER TWELVE
CHAPTER THIRTEEN
CHAPTER FOURTEEN
CHAPTER FIFTEEN
CHAPTER SIXTEEN
CHAPTER SEVENTEEN
CHAPTER EIGHTEEN
CHAPTER NINETEEN
CHAPTER TWENTY
CHAPTER TWENTY-ONE
CHAPTER TWENTY-TWO
CHAPTER TWENTY-THREE
CHAPTER TWENTY-FOUR
CHAPTER TWENTY-FIVE
CHAPTER TWENTY-SIX
CHAPTER TWENTY-SEVEN
CHAPTER TWENTY-EIGHT
CHAPTER TWENTY-NINE
CHAPTER THIRTY
CHAPTER THIRTY-ONE
CHAPTER THIRTY-TWO
CHAPTER THIRTY-THREE
CHAPTER THIRTY-FOUR
CHAPTER THIRTY-FIVE
CHAPTER THIRTY-SIX
CHAPTER THIRTY-SEVEN
CHAPTER THIRTY-EIGHT
CHAPTER THIRTY-NINE
CHAPTER FORTY
CHAPTER FORTY-ONE
CHAPTER FORTY-TWO
CHAPTER FORTY-THREE
CHAPTER FORTY-FOUR
CHAPTER FORTY-FIVE
CHAPTER FORTY-SIX
CHAPTER FORTY-SEVEN
CHAPTER FORTY-EIGHT
CHAPTER FORTY-NINE
CHAPTER FIFTY
CHAPTER FIFTY-ONE
CHAPTER FIFTY-TWO
CHAPTER FIFTY-THREE
CHAPTER FIFTY-FOUR
CHAPTER FIFTY-FIVE
CHAPTER FIFTY-SIX
CHAPTER FIFTY-SEVEN
CHAPTER FIFTY-EIGHT
CHAPTER FIFTY-NINE
CHAPTER SIXTY
CHAPTER SIXTY-ONE
CHAPTER SIXTY-TWO
CHAPTER SIXTY-THREE
CHAPTER SIXTY-FOUR
CHAPTER SIXTY-FIVE
CHAPTER SIXTY-SIX
CHAPTER SIXTY-SEVEN
CHAPTER SIXTY-EIGHT
CHAPTER SIXTY-NINE
CHAPTER SEVENTY
CHAPTER SEVENTY-ONE
CHAPTER SEVENTY-TWO
CHAPTER SEVENTY-THREE
CHAPTER SEVENTY-FOUR
CHAPTER SEVENTY-FIVE
CHAPTER SEVENTY-SIX
CHAPTER SEVENTY-SEVEN
CHAPTER SEVENTY-EIGHT
CHAPTER SEVENTY-NINE
CHAPTER EIGHTY
CHAPTER EIGHTY-ONE
CHAPTER EIGHTY-TWO
EPILOGUE
ABOUT THE AUTHOR
AUTHOR’S HISTORICAL NOTE
“Shell Game” is inspired by actual events that occurred in the United States economy and were the results of a long-term series of actions. Although not a complete list, the following are some of the more important macro-economic, micro-economic, and political events and actions which led to the capital markets crisis that began in 2007, affecting the U.S. and global economies, and precipitating a housing crisis, high unemployment, and a stock market
crash:
In 1975, The U.S. Congress passed the Community Reinvestment Act, which, in part, forced banks to make loans to weak borrowers.
Between 1991 and 2008, the Government Service Enterprises, the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), became rabidly political, making huge political campaign contributions, compromising Congressional oversight of these entities.
Between 1991 and 2008, Congress authorized expanding Fannie Mae and Freddie Mac, which gave them the ability to do greater lending volume with lower lending standards. This allowed the GSEs to make sub-prime loans.
In 1995, the U.S. Congress ruled that 42% of all Fannie Mae and Freddie Mac loans must go to low-income borrowers.
Between 1995 and 1999, the Federal Reserve prepared the economic ground for another boom/bust cycle by expanding the U.S. money supply and thereby reducing interest rates.
In 2000, Congress ruled that 50% of all Fannie Mae and Freddie Mac loans must go to low-income borrowers.
In 2003, the Federal Reserve lowered the Federal Funds interest rate to 1% and left it at that extremely low level for one year.
In 2003, Fannie Mae and Freddie Mac bought $82 billion of sub-prime loans.
In 2004, the Housing & Urban Development Agency ruled that by 2007 56% of all loans it guaranteed should be for low-income borrowers.
Between 2003 and 2008, the U.S. Congress ignored repeated warnings about a housing bubble.
When it became apparent in 2007 that the above events and actions had created an unhealthy excess in the housing market and in the economy in general, the U.S. Congress and the U.S. Treasury took little or no action to mitigate the problem.
From 2008 to 2012, Congress and the U.S. President scapegoated the issue by blaming Wall Street and the banking community.
There is no question greed played a huge part in creating recent economic problems. Participants in that greed included borrowers, lenders, investors, rating agencies, Wall Street investment banking firms, politicians, and others. The housing bubble was not just a banker-generated or a Wall Street-generated event. Without the excess perpetrated by Congress, U.S. Presidents, and the Federal Reserve, the housing bubble wouldn’t have occurred and the economy would not have been as badly damaged as it was.
Every American is painfully aware of the economic recession that began in 2007/2008. What most Americans are not aware of is that the heavy-handed actions of Federal bank examiners exacerbated the situation, restricting community banks from making commercial real estate loans, mandating that banks raise capital at a time when capital was not readily available, taking over banks all over the country and selling them to investors, and forcing banks to pay bloated FDIC insurance premiums three years in advance. These regulatory actions made the real estate market even weaker, driving down valuations and rents and raising vacancy rates.
I labeled the capital markets crash that began in August 2007 as a “1929 event,” and used that language in August 2007 when I communicated my fears about the future impact of the crash with members of Congress and with U.S. Treasury officials. My warnings were ignored.
Time has proved my warnings correct, but I gain no satisfaction from this. I can only wish the brain trusts in Washington, D.C. and on Wall Street have learned something from past and current events. I am not hopeful.
1989
PROLOGUE
Katherine Winter had had it made. Not that she was arrogant or over-confident about it. That’s just the way things were. Tall, blonde, athletic, and beautiful in a patrician, Grace Kelly way, she looked at least five years younger than her thirty-seven years. She was married to Frank Winter, the love of her life, and had two bright, healthy children: Thirteen-year-old Edward and eight-year-old Carrie.
The family had a comfortable life, living in a five-bedroom home on a two-acre lot in Chestnut Hill, a high-end community on the northwest side of Philadelphia. The children attended private schools in the area. They summered in Cape May, New Jersey, where the family owned a vacation home, and took annual ski trips to Taos, New Mexico.
Frank Winter was president and majority shareholder of First Savings Bank, chairing the board of the local country club while Katherine oversaw the board of Carrie’s school and served as a director of several popular charitable organizations.
Katherine’s vision for the future was all “up” and no “down.” Until forty-year-old Frank had dropped dead from a massive coronary episode in 1988.
Frank had been Katherine’s first and only love, her hero. They’d met at the expensive Villanova University, which Frank, the third son of a western Pennsylvanian coal miner, attended on a football scholarship, and Katherine, the orphan child of Irish immigrants killed in a car wreck, attended on an academic scholarship.
Losing Frank was a numbing nightmare to Katherine. But she sublimated her grief as she tried to comfort her son and daughter. She saw their sorrow in the strain on their faces, in the lost look in their eyes. Edward no longer met people’s gazes, preferring to stare at the floor, slightly hunching his shoulders. Carrie alternated between crying and retreating into an emotionless, silent shell. For the five days between their father’s death and his funeral, the children retreated into a dark universe Katherine couldn’t penetrate.
On the day of the funeral, Frank’s absence stabbed at Katherine. The children’s silence and obvious grief were weights immersing her in an ink-dark gelatinous pool from which there was no escape. Her son was catatonic. At least Carrie, when she cried, showed her grief.
The family walked from the limousine to the gravesite. While Carrie lagged behind, Katherine wrapped her arm around Edward’s teenage shoulders, hoping to feel something other than the rigidity that had defined him for the last five days. Twenty steps from the car, Edward suddenly stopped and turned to face her. Katherine searched his face, waiting for him to speak.
“Mom, I’ll take care of you and Carrie,” he said, a seriousness in his voice she had never heard before. “I don’t want you to worry about a thing.”
This was the last thing she imagined her son telling her, and it was the last thing she wanted to hear.
* * *
Two days later, on Monday morning, Katherine met with Paul Sanders, the family attorney. Professionally, she had dealt minimally with Paul; Frank had handled their business affairs and her contacts with the lawyer had been primarily social. Paul was a distinguished, professorial-looking Philadelphia lawyer from the Main Line. He was of medium height and trim, and she couldn’t remember a time when she had seen him wearing anything but a blue pinstripe suit. Katherine had always vaguely liked the man, but thought he was nerdy and perhaps too obsessed with the law.
“I’m so sorry about your loss, Katherine,” Paul told her. “I can’t believe he’s gone. Frank and I used to talk nearly every day. I feel a void I can’t seem to fill.”
“Thank you, Paul. I know you and Frank were close. He thought the world of you.”
“He was my best friend.”
“Mine, too,”
Paul nodded and sighed. “Well, shall we take care of business?”
Katherine nodded back.
Paul pulled out a chair in front of his desk for Katherine, then walked around to the other side and sat down. He cleared his throat and opened a file on his desk.
“Frank accumulated significant assets—real estate primarily.” He paused and cleared his throat again, looking at Katherine uncomfortably. “Unfortunately, nearly everything is mortgaged. With the recent downturn in real estate values due to the Tax Reform Act passed two years ago and the recent acceleration in interest rates, there isn’t much equity left.”
“What does that mean, Paul?” Katherine asked, feeling suddenly flushed. She shifted in her seat.
“It means Frank borrowed to get into real estate deals with a promoter. He ev
en took out mortgages on your Cape May place and your residence here in Philadelphia. In the current market environment, any sale of these properties would yield almost nothing after paying closing costs.
“Our home, too? She paused, taking his silence as her answer.
“How’s that possible?”
Paul didn’t look her in the eyes. “You signed all the loan documents, Katherine.”
“I didn’t know what I was signing. Frank managed these things.”
“I know”
“What about the bank accounts?” she asked.
“Well, of course there is some cash.” He riffled through the file and clarified: “$23,000 and change in a checking account, and $188,000 in Frank’s retirement account.”
“At least there’s the bank stock,” Katherine said. “We—”
Paul interrupted. “He used the bank stock to collateralize the real estate debt. The dividends from the stock have covered part of the losses from the real estate holdings over the last couple of years. Half his salary was being used for the same purpose. He even borrowed against his life insurance policies to support the real estate deals. So, there’s little you can expect to get from those policies. With Frank gone, without his salary, the banks he borrowed from have started to protect themselves. They want to know how you’re going to keep the loans current.”
“How can I make those payments? I have no income of my own.”
“If you can’t make the payments, the banks will foreclose on the real estate and the bank stock, which will involve a protracted, expensive legal process.”
Katherine covered her face with her hands. She sat silently for several seconds, then dropped her hands and stared blankly at Paul. “What does this mean?”
“I’ve had appraisal reviews done on all the real estate: Apartment houses, warehouses, one office building. I asked a realtor to write up a market analysis on your home here and the Cape May place. The only property that has any real equity is your primary residence. Trying to hold on to any of the properties will make your financial situation worse. Because of the economy, the commercial properties have a lot of vacancies, meaning the rents don’t cover the expenses. With no other income, you have no way to cover the mortgage payments and other expenses. The upshot is you can pull about $25,000 from your home, the $23,000 in the checking account, $27,000 from the insurance policies, and the $188,000 from Frank’s retirement account. That’s $263,000 in total. There will be taxes and expenses to pay on that, income and probate. You might have $200,000 after all is said and done.”