$4 Million Bullet Dodged

By: Ken Mixon

Mixon, Ken color copy In 1998, I was working at a bank in Plano, Texas. My boss called me into his office and told me he wanted me to meet with William (Bill) Brooks. Bill had an unusual request and my boss thought I was the perfect guy to talk with him since I had both a lending and operations background.

Bill was a current customer of the bank. He had grown up in Plano and was like a son to one of our directors. Bill owned a number of companies. One was an armored car company but his main company was an ATM company. He placed ATMs in convenience stores throughout Texas, Arizona, and Colorado. At the time I met with Bill, the bank had a couple of small loans to the ATM company totaling less than $100,000.

I sit down with Bill. Bill explained the nature of his request.

Bill had more than a hundred ATMs in stores and he had to keep cash in these machines. He had an arrangement with a bank in Colorado where they were providing him with over $4,000,000 in cash to stock his ATMs.

At first, I thought that the Colorado bank was loaning Bill the $4 million to stock his ATMs. But he said no, they were only supplying the cash. I was confused. Bill explained that the cash was owned by the banks and was shown on their balance sheets as vault cash. This made no sense to me but I listened to his further explanation.

Bill said that because the cash was in the control of a bonded armored car company, the Colorado banks were able to show that the cash was still in their control. He said the accounting had been approved by the banks’ regulator and that he could get me a copy of that opinion.

I asked Bill why he wanted my bank to start providing him with cash if he already had a bank providing it. He said that, while the bank was happy with the business, they kept increasing the cost of providing the cash. The cost was currently $4,000 dollars a month and Bill wanted to reduce that cost.

I took the billing information from the other banks back to my office to give it some study. After I looked at the information for a while, my boss came into the office. After hearing the details, he was fired up to do the deal. He said we could charge Bill $3,000 a month and that $36,000 a year would greatly help our cost center. I looked at my boss and said that I could not see how I could recommend that our bank take this over. I said this arrangement made no sense to me.

My boss said, “Mixon, you are not getting it. Our bank is going to make $36,000 a year with almost no risk.” Plus, he reminded me, Bill was well known to our bank. We had a long discussion. He criticized me for not thinking out of the box.

I told him that I could not figure out how to make the risk equal the return. What Bill was proposing was for his two companies to have complete access and control to $4 million of our bank’s cash. I could not calculate the return the bank would need in order to take on that risk.

My boss asked me if I was smarter than this Colorado bank. I said I did not know but the deal just did not make any sense to me. My boss was not happy with me (and later included this on my review). But we turned down the request.

About two years later, Bill disappeared with the funds. He reappeared in a few months and was arrested.

This is from Denver AP, 2002:

William E. Brooks, 38, of Southlake, Texas, was found guilty in October of 46 counts of bank fraud, wire fraud and money laundering for a scheme targeting BestBank of Boulder. BestBank has since been taken over by Pueblo Bank & Trust.

Brooks was sentenced to nearly six years in prison for defrauding two Colorado banks of about $9 million and ordered to pay $9.2 million in restitution to the FDIC, the U.S. attorney’s office said Tuesday.

For more than a year, he used his companies to divert money designated to stock ATMs into accounts that he controlled, the U.S. attorney’s office said.

To me, there are a number of lessons in this story:

  1. Be thoughtful when calculating risk versus return. Do you really understand the risk?
  2. Beware the deal that does not make good sense. Just because another bank is doing it does not mean that it is good business.
  3. Trust your instincts. I know when I have ignored my instincts; the outcome has usually been unfavorable for the bank.

I do not know how this scam grew from $4 million to $9 million.

 Ken Mixon is President and CEO of City National Bank in Corsicana, Texas. 

Post Mortem

By Don Reavis

strong>don reavisMy friend Gib Blackman has invited me to finally contribute something to the world of written comments on the subject of banking. I say finally because for several years I’ve considered writing about subjects that are interesting to me but was never sure that they would be interesting to others. Now I guess we’ll all find out together.

I’ve chosen Post Mortem as the name of my blog because that’s the name many of us associate with the process of determining what went wrong in a banking situation that turned brown on us. More often than I enjoy thinking about, during my years in banks I occasionally had to do a jaw-dropping, “Huh! How’d that happen?” In my experience in my bank consulting practice I’ve run across yet others. My hope is that this blog can be instructive for some of you in banking still unscarred by unfortunate acts of commission and omission.

A good part of our consulting practice consists of problem loan workouts. If Murphy’s Law was ever a bedrock tenet of a banking process it’s got to be in workouts. Some of us who regularly do workouts would swear over a cold adult beverage that Murphy was an optimist at best. My blogs will frequently be about lessons learned from actual unpleasant situations. Better my readers hear them from me than experience them firsthand. I’ll be certain to mix the facts up enough to protect privacy and confidential information.

As a general comment this initial issue is to beg those of you with loan portfolio management responsibility to stop shooting yourselves in the foot. The situation I’m talking about occurs when you do the first credit downgrade like you’re supposed to, but then you wait until there’s been tons of unpleasant discussion with your borrower to figure out if you’ve got a valid Plan B alternative. Plan B is typically foreclosure and liquidation and the time to figure out if there’s anything that needs to be fixed is when you and your borrower are still smiling at each other.

Oh, I know you’ve got strict policies and practices regarding loan closing procedures, attorney drawn real estate docs, exception tracking and all the rest of those things that keep mistakes from happening. Just keep in mind my earlier comment that Murphy was an optimist. You will find that the largest percentage losses on a loan typically occur when there was some kind of preventable mistake that slipped through all of those carefully crafted policies and procedures.

So before you take careful aim at your wingtip, boot, or open-toed pump you need to think Plan B all the way through.  It’s what we call a workout assessment, and that means through the sale of that collateral you may have to foreclose and what you do about the probable deficiency. Just about anything you’ll need to fix is going to require some cooperation from the borrower so do your workout assessment while you’ve still got a chance to fix the problem. Those problems are out there—trust this old battle-scarred veteran banker!

My readers are welcome to send me their favorite stories of unfortunate banking situations. Misery loves company and I’ll include the most interesting ones in future blogs.

Don Reavis is President/CEO of Silverstone Consultants located in Richardson. He can be reached at don.reavis@silverstoneconsultants.com.” alt=”don reavis” width=”172″ height=”172″ />My friend Gib Blackman has invited me to finally contribute something to the world of written comments on the subject of banking. I say finally because for several years I’ve considered writing about subjects that are interesting to me but was never sure that they would be interesting to others. Now I guess we’ll all find out together.

I’ve chosen Post Mortem as the name of my blog because that’s the name many of us associate with the process of determining what went wrong in a banking situation that turned brown on us. More often than I enjoy thinking about, during my years in banks I occasionally had to do a jaw-dropping, “Huh! How’d that happen?” In my experience in my bank consulting practice I’ve run across yet others. My hope is that this blog can be instructive for some of you in banking still unscarred by unfortunate acts of commission and omission.

A good part of our consulting practice consists of problem loan workouts. If Murphy’s Law was ever a bedrock tenet of a banking process it’s got to be in workouts. Some of us who regularly do workouts would swear over a cold adult beverage that Murphy was an optimist at best. My blogs will frequently be about lessons learned from actual unpleasant situations. Better my readers hear them from me than experience them firsthand. I’ll be certain to mix the facts up enough to protect privacy and confidential information.

As a general comment this initial issue is to beg those of you with loan portfolio management responsibility to stop shooting yourselves in the foot. The situation I’m talking about occurs when you do the first credit downgrade like you’re supposed to, but then you wait until there’s been tons of unpleasant discussion with your borrower to figure out if you’ve got a valid Plan B alternative. Plan B is typically foreclosure and liquidation and the time to figure out if there’s anything that needs to be fixed is when you and your borrower are still smiling at each other.

Oh, I know you’ve got strict policies and practices regarding loan closing procedures, attorney drawn real estate docs, exception tracking and all the rest of those things that keep mistakes from happening. Just keep in mind my earlier comment that Murphy was an optimist. You will find that the largest percentage losses on a loan typically occur when there was some kind of preventable mistake that slipped through all of those carefully crafted policies and procedures.

So before you take careful aim at your wingtip, boot, or open-toed pump you need to think Plan B all the way through.  It’s what we call a workout assessment, and that means through the sale of that collateral you may have to foreclose and what you do about the probable deficiency. Just about anything you’ll need to fix is going to require some cooperation from the borrower so do your workout assessment while you’ve still got a chance to fix the problem. Those problems are out there—trust this old battle-scarred veteran banker!

My readers are welcome to send me their favorite stories of unfortunate banking situations. Misery loves company and I’ll include the most interesting ones in future blogs.

Don Reavis is President/CEO of Silverstone Consultants located in Richardson. He can be reached at don.reavis@silverstoneconsultants.com.