Bankers’ Hours: Manafort and the loan to one borrower limit
You may have heard about Steve Calk, the CEO of Federal Savings Bank of Chicago, who is charged with bank fraud in connection with some $16,000,000 in loans to Paul Manafort, the former presidential campaign manager. The purpose of the financing was to prevent foreclosure of properties owned by Manafort.
A reading of the charges, which can easily be found online, is a fascinating short tutorial on one of the cornerstone regs of banking: the loan to one borrower limit.
Mr. Calk was the bank’s largest stockholder in addition to CEO; Manafort’s loan request probably seemed like a gift from heaven, because Calk desperately wanted a job in the new administration.
Remembering that assertations in an indictment are allegations until proven, and that the indicted party is innocent until it’s established otherwise, the document is a primer on how a banker can be lured into extending the only real benefit in his or her power to offer in return for a compensating benefit: a loan.
The regulation referred to, and the linchpin of the government’s case against Steve Calk, relates to a bank’s regulatory lending limit, the so-called “Loans to one Borrower” reg. Quite simply, a bank violates the rule if it exceeds the dollar amount of that limit, and the consequences are very unpleasant.
Essentially, the reg is clear-cut. A bank can’t exceed 15% of its capital (net worth) in a loan, or combination of loans to one borrower. There are nuances to this that can create some complexity, but the 15% factor is good enough for government work.
Most banks have an “internal lending limit” below that amount that is seldom breached, simply because you don’t want to abrogate the restriction inadvertently as, say, in an instance where you might advance money to pay real estate taxes.
Every activity, profession and job have basic rules you never think of ignoring:
Skydiving: Pull Ripcord After Exiting Aircraft.
Surgery: Wash Hands Before Cutting
Landscaping: Green side up
The Loans to One Borrower limit was a big factor in targeting bank fraud in the S&L debacle of the late ’70s and early ’80s of the last century. Remember that event? It was the banking crisis before the last one in 2008, which was the last one before the next one in … Guess you’ll have to fill in the blanks for that event.
S&L executives, especially those who acquired institutions on the heels of banking deregulation in the ’70s, often tended to be cavalier about the rule, making improper loans to friends, family, business associates and even blackmailers.
I remember a conversation with one thrift examiner who said, “You can’t believe how often we find violations of the loan limit. And it’s simple math.” These bankers often cited the “Confessional Rule”: “It’s better to ask forgiveness than permission.”
According to the indictment doc in the Calk Case, Paul Manafort, at the time the president’s campaign manager, and his son-in-law had multiple properties facing foreclosure auctions, and they found their way to Steve Calk’s bank, which had a loan production office in Manhattan, looking for bail-out financing.
To get the picture, imagine your reception if you walked into your own bank, saying, “My primary home, my second home in Steamboat, and a rental unit in Gypsum are in foreclosure. I need a big chunk of money in three weeks to stop foreclosure auctions.”
You’d be permitted to finish your complimentary coffee, and maybe a cookie, before being ushered out.
But Manafort got a warm welcome. After all, at that point, he needed only some $9.5 million, and he was an extremely high profile public figure. What banker wouldn’t want to be nice to him?
The charging papers certainly assert that Steve was. They show that he allegedly expedited underwriting to accommodate the borrower’s imminent foreclosure auction date. The bank’s underwriters didn’t initially approve the request, based on the borrower’s ability to repay.
A no answer obviously wasn’t what the borrower wanted to hear, nor, according to the indictment, did Steve. So the deal went through underwriting again, and it turned out to be, the government alleges, a much better loan the second time around. At least it got approved.
That’s when, the DOJ claims, Steve set Paul a list of the cabinet posts he’d like, starting with Secretary of the Treasury, working down to Ambassador to Italy.
As we all know, Manafort stepped down as campaign manager, but was assumed to be a top advisor within the campaign and, after the election, with the transition team. Calk did get appointed to a prestigious pre-election panel of economic advisors, many of whom ended up with plum jobs in the executive branch.
The indictment alleges that Steve continued sending lists and lobbying for a cabinet position, and it appears that his hopes were high that he’d land one.
But then, in December 2016, those hopes were on the brink of being dashed, the document claims. It seems $9.5 million wouldn’t be enough; to keep the properties off the auction block, the ante had been upped by another $6.5 million, which would exceed the bank’s legal lending limit.
The loan officer in the bank’s Manhattan office was frenziedly trying to lay the new request off to another lender and wasn’t succeeding. It seems that even Hard Money couldn’t stomach the deal.
Time was running out for the borrower, and Calk was desperate: no loan, no leverage, and no position of power on the world stage, or at worst, sunny holidays in Tuscany.
So Steve allegedly did what bankers too often seem to do, against all common sense: He closed his eyes, held his nose, and did the deal. If the allegation is proven, maybe he was thinking, “Hey, I’m a smart guy. I’ll figure a way to fix this.”
Manafort did put in a good word for him, and Calk did get an interview for a position as Undersecretary of the Army.
He didn’t get the job. And, surprise, surprise: Manafort didn’t pay the loan back.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is email@example.com.
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