Shell Game (Stand Alone 2)

by Badal, Joseph

  “It sounds like a shell game,” Edward said.

  “The ultimate shell game.”

  “How can you be so sure about the recovery time?”

  “Two reasons. First, because it happened before. Someone once said that history is not one damned thing after another; it’s the same damned thing over and over. It took ten years for real estate markets to recover after the ’86 Act; it’ll probably take at least as long this time. Economic and financial dislocations like this are dream killers. They destroy people’s savings and investments, small businesses, and millions of jobs.”

  “Based on your description of things, it sounds to me as though the federal government is the real dream killer.”

  “You could say that,” Snowden agreed. “It’s the macro killer. But guys like Gerald Folsom, in a much smaller, but more personal, vicious way, murder people’s dreams as well.”

  “You said two reasons.”

  “Yeah. In February of this year, the Congressional Oversight Panel of TARP issued a report about commercial real estate. It wasn’t encouraging. Commercial real estate debt totals $3.4 trillion in the United States. Banks hold forty-five percent of that total, or about $1.5 trillion. According to the panel, smaller banks had commercial real estate portfolios equal to one point six times their total risk-based capital. By the third quarter of 2006, that had increased to three point two times. Because the typical commercial real estate loan has about a 20-year maturity and a 5-year call, there is real concern, especially in an environment like today’s, where real estate values have declined so much, that when the 5-year call period is up on many of these loans, the value of the real estate will be below the loan amount. The bank and the borrower will find themselves underwater. Just like they did with residential properties.”

  “Fortunately, that’s not our situation,” Edward said, half-hoping Snowden might find a way to still finance the company’s debt.

  “Yes, but what if you can’t find a bank to refinance your loans? What if every bank in the country has the same problem we do? If you can’t refinance your loan balance when your loan matures, what do you think is going to happen?”

  “The bank will place us in default on our loan,” Edward said, feeling sick.

  “I know none of this is fair, to you or to the banking community,” Snowden said. “But it’s the situation we have to live with. The regulators are forcing banks to shrink their balance sheets at a time when the country needs banks to stimulate the economy.”

  “So what do we do?”

  “Try a couple other banks; maybe you’ll get lucky. But I wouldn’t count on it, because your financing needs are real estate-based. Commercial real estate loans have been branded by the regulators as toxic, regardless of the quality of the borrower or the current status of the loan. Your best bet is to work out a deal with Broad Street National.”

  CHAPTER THIRTEEN

  Katherine stopped at the post office on her way to the Winter Enterprises’ headquarters building. She opened her box, hoping there would be a letter from Carrie. She hadn’t heard from her daughter in over a month and had a difficult time not letting her imagination run away with itself with visions of her daughter lying in a pool of blood or in the hands of some Islamic terrorist group.

  She rifled through the stack of mail and nearly shouted for joy when she saw an envelope with Carrie’s handwriting. She rushed out to her car, throwing the rest of the mail on the front passenger seat and slicing open the letter.

  Dear Mom: I’m sorry I haven’t written more often, but it’s not really practical. Even if I wrote a letter, there would be no way to mail it.

  Katherine felt a pain in her chest. My God, she thought, what sort of hellhole is my daughter in? She continued reading.

  The good news is that my assignment is complete. I am being treated for some intestinal bug you can’t avoid where I was and I’ll be released in about a week from the Army hospital in Riyadh, Saudi Arabia. I’ll be on the first plane back to the real world. I should be home when Betsy’s baby arrives.

  I’ve got a thirty-day leave scheduled, before I report for duty at the Pentagon. Believe it or not, I’m coming home for that leave, and then I’ll be at the Puzzle Palace for at least twenty-four months. Think about weekends in Cape May. I can already taste the linguini and clams at Cucina Rosa.

  Anyway, that’s all for now. I feel rumbling going on in my nether regions, which means I’ll have to make a run to the john any moment now. No need to worry. A bit of antibiotic and lots of fluids and I’ll be as good as new in a couple days.

  Please hug Eddie and Betsy for me and give them my love.

  Love, Carrie

  Katherine knew her daughter well enough to know she was downplaying her illness, but couldn’t help but feel relieved that Carrie was back in civilization, so to speak. She couldn’t wait to tell Edward his sister would be home soon. Then Katherine came down from her high, thinking about how Carrie’s homecoming would be in the midst of the crisis with the bank. It wouldn’t be much of a leave for her, with her mother and brother tied up with problems at the company. But at least she’d be safe.

  CHAPTER FOURTEEN

  Edward felt beat up as he and Nick walked out of Pennsylvania Industrial Bank’s main office on City Line Avenue at 5 p.m. The bank’s president, Victoria Watts, had been courteous and quite evidently embarrassed by the bank’s present circumstances. She was nowhere near as candid as Van Snowden, but Edward could fill in the blanks. She did mention they had been required to raise their core capital and risk-based capital ratios, and they were not considering any new commercial real estate loans for the foreseeable future. She also told them U.S. banks had posted their biggest drop in lending since 1942.

  “You know, I’ve got a thought,” Edward said after he pulled out of the bank parking lot. “Let’s call Ernest Deakyne at Philadelphia Savings & Trust and ask him if he has an interest in financing our real estate. If not, we won’t waste his time or ours by keeping our appointment tomorrow.”

  “Good idea,” Nick said. “I’m getting the impression these bankers would be thrilled to have our business, as long as we don’t ask for any credit.”

  Edward laughed. “I shouldn’t see any humor in this, but I’m beginning to feel like Alice in the looking glass. Surreal.” He handed his Blackberry to Nick. “Pull up Deakyne’s number. Let’s call him right now.”

  Nick found the banker’s name and scrolled down to his office number. He listened to the car’s Bluetooth system dial the number.

  “Philadelphia Savings & Trust,” a woman said. “Mr. Deakyne’s office.”

  “Hello, this is Edward Winter of Winter Enterprises. I have an appointment with Mr. Deakyne tomorrow and need to talk with him for a minute.”

  “Yes, Mr. Winter. This is Jeanne, Mr. Deakyne’s assistant. I made the appointment for you. Can you hold a second?”

  Edward and Nick listened to the canned music on the bank’s telephone system for about thirty seconds before Deakyne came on the line. “Ernest Deakyne.”

  “Hello, Mr. Deakyne. Edward Winter calling.”

  “Mr. Winter, good to hear from you. Are we still on for tomorrow?”

  “That’s what I’m calling about. By the way, I have you on speaker in my car. Our CFO, Nick Scarfatti, is here with me.”

  “Hi Mr. Scarfatti,” Deakyne said. “What can I do for you?”

  “We’ve been reading and hearing a lot about banks not wanting to make commercial real estate loans because of pressure from banking regulators. Our financing needs are heavily real estate oriented. We wanted to make sure this wouldn’t be a problem for you. We didn’t want to waste your time.”

  Deakyne paused, as though gathering his thoughts. Edward expected to hear that there was no point in visiting with them the next day. “I very much appreciate your courtesy in calling me, but, unlike most of the banks in our area, we don’t have a big exposure to commercial real estate. When other banks were participating in the real estat
e boom, we took the conservative route. As a result, we have money to lend and feel that real estate values have pretty much hit bottom. We would be pleased to consider your loan request.”

  Edward and Nick looked at one another with expressions of ecstatic shock. “That’s good to hear, Mr. Deakyne. We’ll be there at 10 in the morning.”

  “Looking forward to seeing you, gentlemen.”

  Edward took his phone back from Nick, terminating the call and giving Nick a high five with his right hand. “Just when you think there’s no hope, opportunity raises its beautiful head.”

  “I’m not deviating from my current negative mindset until you sign loan papers and I see the payoff confirmation from Broad Street Bank,” Nick said, although Edward could hear relief in his voice.

  “Kiljoy.”

  “Realist. After what we heard today, I didn’t think there was a bank in America that could help us.”

  Edward looked at the dashboard clock and said, “4 o’clock. Even though I’m tempted to stop at McNally’s Tavern and get one drink short of plastered, I’m going to the office. You want me to drop you off at your house first?”

  “No, I’ve got a couple hours of work to do too. I’ll need a ride home later.”

  “Just let me know when you’re ready to leave. By the way, we ought to process the checks and credit card receipts in the vault. We can’t hold onto them forever. Even if we find another bank, it will take weeks to get the legal work completed.”

  “Already taken care of. We opened an account at Third Community Bank, that little bank down the street from the office. The branch manager nearly had a heart attack. A $600,000 deposit of checks and credit card payments is a lot of paper for a little bank.”

  “They shouldn’t get too attached to that money. We’re going to move it as soon as we find a new lender.”

  CHAPTER FIFTEEN

  Gerald Folsom entered the board room at Broad Street National Bank and sat at the head of the table. This was the first meeting he’d attended at the bank since the Feds took it over at 5 p.m. the previous Friday. Now that his CFO, Sanford Cunningham, had wrapped his hands around the high-level stuff – the computer systems, the loan and investment portfolios – he was ready to be briefed. Cunningham was already seated on Folsom’s right; Eli Black, the bank’s acting president, to Folsom’s left. Others in the room were Stanley Burns, Chief Credit Officer, seated next to Black; Sarah Long, Chief Operating Officer, seated next to Cunningham; Alexi Chenko, IT Department manager, seated next to Burns; and Frances Dougherty, the Chief Investment Officer, seated next to Long.

  Folsom pounded the file in front of him and barked, “Let’s do this.” He looked at his watch. “It’s 3 o’clock. I want to be on the road by no later than 4.”

  Used to Folsom’s management style, Cunningham looked around the room and wanted to laugh at the surprised looks on the others’ faces, but knew that wouldn’t be appropriate. Instead he jumped right into the agenda. “Ms. Dougherty, please brief us on your area.”

  Frances Dougherty was a fifty-eight-year-old woman who started at the bank right out of high school, working her way up from teller to Senior Vice President of Investments. She managed the investment portfolio, which included the bank’s investments in Treasury bonds and bills, other securities, overnight funds invested with the Federal Reserve, among others. She also set interest rates on the bank’s certificates of deposit and money market and savings accounts.

  “As of close of business yesterday,” she said, “we had $53.2 million in Treasuries, $36.0 million in mortgage-backed securities, and $112.0 million in municipal bonds in the bank’s portfolio. In addition—”

  “What’s the average yield on the portfolio?” Folsom demanded.

  Dougherty referred to a sheet of paper and answered, “three point one percent on the federal government bonds, five point eight percent on the MBS, and two point four percent on the Muni’s. The weighted average yield is almost three point two percent. And keep in mind the Muni’s are tax-exempt, so the actual after-tax yield is even greater.”

  “You’re okay with that performance?” Folsom asked.

  Dougherty’s face reddened. She seemed confused for a moment. “I’d say that’s pretty good performance considering the economic climate and the bank’s aversion to taking too much risk.”

  “And on a mark-to-market basis, what’s the current value of the portfolio?” Folsom pushed.

  “The Treasuries and Muni’s are in a profit position of 101.2, or slightly more than $167 million.”

  “And the MBS?”

  “The mortgage-backed securities are marked at eighty-three percent of par. We’ve lost $6.1 million on that part of the portfolio.”

  “Jesus Christ! What idiot put us in mortgage bonds?” Folsom suddenly looked rabid.

  Dougherty’s lips compressed. She straightened her back and stuck out her chin a bit. “I am the head of the Investment Committee. I am responsible for our investment policy. I—”

  Eli Black cleared his throat, interrupting. “Our investment decisions are made by committee. Frances executes our strategy. Despite the drop in the mark-to-market valuation of the MBS, the performance of that part of the portfolio is exceptional. Delinquencies are less than two percent, despite what has been going on in the residential real estate markets. And as the economy improves so will the value of these securities.”

  Folsom glared malevolently at Black. “Nice speech, Mr. Black. That kind of attitude caused the Feds to bring me in to salvage this sinking ship.”

  “I believe that’s a mischaracterization of this bank, Mr. Folsom. Broad Street National has continued to be profitable, despite the economy, and the regulators’ action in taking over this institution was without justification.”

  Folsom leaned back in his chair and roared with laughter. The others in the room sat as though frozen in place. Cunningham let slip a sly smile.

  “You don’t seem happy about the ownership change, Mr. Black. In fact, you look downright displeased. The last thing I want is unhappy employees.” He turned to Cunningham. “Sandy, escort Mr. Black down to his office, give him five minutes to collect his personal things, and then toss his unhappy ass out on the street.”

  Black jumped out of his chair and stormed out of the room without a word. Cunningham followed him out.

  “Anyone else want to defend the bank’s investment strategy or portfolio?” Folsom asked, an edge of malice to his voice.

  Frances Dougherty lowered her head as the others stared at one another silently . No one made eye contact with Folsom.

  “Ms. Dougherty,” Folsom said.

  She raised her head slightly and looked in Folsom’s direction.

  “What’s the size of the CD portfolio and its average interest cost?”

  Dougherty referred to another sheet of paper. “$479 million at an average cost of slightly less than three point five percent.”

  “Are you aware that when the FDIC takes over a bank it has the power to renegotiate all contracts, including CD contracts?”

  She slowly nodded.

  “Good. Mr. Cunningham will provide you with a letter tomorrow that I want mailed to every CD depositor on Thursday, reducing the rate we pay on all CDs. I want our average cost on CDs to be one point two percent.”

  Frances Dougherty looked frightened, but she mustered the courage to respond. “There will be a run on the bank. We have a large number of customers who are retired, who depend on their monthly interest payments. They’ll cash in their accounts and take them elsewhere.”

  “Fuck them!” Folsom barked. “That’s exactly what I expect and want to happen. The last thing I want around here is a bunch of retiree depositors sucking off this bank’s teat.” He paused and stared at Dougherty. “You have a problem with that?”

  She shook her head and mouthed, “No, sir.”

  “Good.” Folsom turned to Stanley Burns. “Okay Burns, let’s hear about the loan portfolio.”

  Stanley Burns was
a forty-nine-year-old who had started his banking career with Bank of America and been recruited by Broad Street National in 2005. The driving force behind the growth of Broad Street National Bank’s commercial loan portfolio, he was a dynamic, sales-oriented lender who had a great way with customers. At the moment, though, he was not feeling good about his role in that growth. He hoped his weariness didn’t show as he slouched in his chair, appearing as though he was trying to hide behind the table in front of him. At six feet four inches tall and two hundred twenty pounds, that wasn’t easy. He hesitated during his presentation when Sanford Cunningham nonchalantly returned and took his seat.

  “Something wrong, Burns?” Folsom asked.

  Burns swallowed, shook his head, and continued to summarize the yield on the loan portfolio, the delinquent loans, those that were under-collateralized, and those maturing in the next six months. He estimated any losses the bank might take. After twenty-five tense minutes, Burns finished.

  After a beat, Folsom began. “I want a few pieces of information, Mr. Burns,” he said. “And I want them by the end of business tomorrow.

  “First, I want specifics on the delinquent loans that are underwater. What’s the estimated fire-sale value of collateral securing underwater loans? If we have personal guarantees on any of these loans, what’s the chance of collecting on those guarantees? Are we holding other collateral in addition to the real estate on any of these underwater borrowers?”