Sunday, December 28, 2008

A Scum Sucking Parasite Called "Aramis"

I wanted to highlight this group of "men" out there who claim to be "rich" but perpetually post losses on their tax returns. It gets back to some previous posts I've made wherein the housing crash and financial crisis was caused largely by "men" who never made a profit, but just moved large quantities of money around, siphoning off money for themselves to live off of and afford themselves a faux jet-set life style. Thus, I present to you an excerpt from my book about a scum sucking parasite called "Aramis;"

"While Zorba was the last of the three musketeers I dealt with, Aramis was the first. And though not as eccentric as Zorba, he too had his similarities and eccentricities. Like Zorba, Aramis was also a “super tan man.” Though without the Hawaiian shirt in January and a medallion nestled in his chest hair, his hue told me he was also spending an inordinate amount of time in a tanning booth or on a beach. Additionally, Aramis was in real estate, and like Zorba was what I called a “pretty boy” real estate developer. “Pretty boy” meaning they may have been the “developer” of a property, but they weren’t the actual ones laboring to build the property. The “real” developers wore work boots to the bank and dusted up our chairs with sheetrock dust. The Three Musketeers just moved money around. Aramis was also a good friend of the banker, and like Zorba would talk about actual business 10% of the time and grilling, drinking, boats, cars and golf the remaining 90% of the time. They were quite the same.

But while Aramis and Zorba were similarly exotic, the deal he brought into the bank was so commonplace and overdone that the details are not worth explaining. Aramis was a developer who wanted some amount of money to build some new twin home development, in some far flung suburb, targeting some group of young folk. Aramis hadn’t conducted any kind of absorption study, therefore compelling me to pull some quick supply figures. These figures would show an excessive and gluttonous level of similar housing in the area which would guarantee the spectacular demise of this development. But of course I would be countered with the argument these developments were different because they threw a duck feces-infested pond in the back, had a club house or some other such thing, and therefore would not only sell, but sell faster and for more than the comparables. Besides which, Aramis could personally guarantee the loan; please write it up anyway.

It was the same broken record song I had heard a million times before.

But while his deal was common, Aramis had two exceptional and unique skills; tax returns and guilt tripping.

In true real estate developer tradition, Aramis furnished nowhere near the amount of documentation necessary to fully and adequately analyze his proposal. And like most other developers before him, he failed to file his taxes on time, had to file an extension and so we were stuck with a 2005 tax return that was now approaching 19 months old.

But what was most disturbing wasn’t that his tax return was dated, but that it showed a loss in 2005. And not only that, but his 2004 tax return also showed losses. Given his stories that paralleled Zorba’s about going out on the boat, Arizona golfing trips and other such luxuries, I found it odd that according to my tax returns I made more money than this presumed real estate mogul, yet I was not living his middle-aged-man, Metamucil jet set lifestyle. This, combined with a dearth of other documentation I needed to write up the loan, made it highly unlikely we were going to approve Aramis’ latest real estate development.

When I presented my findings to the banker, particularly the fact he had lost money in two years that were presumably banner years for real estate, I was more confident than usual this deal would be shot down. But as bankers became more and more desperate as the housing situation became progressively more dire, surprises became more and more frequent, and I was about to get one of the most outlandish lines that would resurrect my now perfected credit union face of disbelief;

“Well, he shows losses on his tax returns to lower his tax bill. He makes a lot of money; he’s just trying to hide his income.”

Being a capitalist and understanding the natural incentive to lower one’s tax bill, I could appreciate an individual taking whatever legal measures necessary to minimize their reported income. But I also knew the difference between cash expenses and non-cash expenses, as well as stated profits and cash flow. It was one of the most incredulous lines of BS I had ever heard in my entire banking career.

“Oh, I know that he’s showing losses on his tax returns. Oh, and I know it was during the two best years in real estate history. But you see, he’s really making money. He has $4 million in cash just floating around. You just don’t see it. But it’s there. It’s invisible! It’s magic money!”

Additionally, the banker said it so matter-of-factly I almost sensed he was trying to insult me or make it sound like this was common knowledge. That all multi-millionaires show losses on their tax returns. But he may as well have been trying to convince me it was just as common knowledge that gnomes protected the bank’s vaults at night with their swords that were made by magic Federal Reserve fairies.

Crazy as an excuse as it may have been, I had heard this excuse once before from another developer in my days at the credit union. But in his case it was legitimate as he furnished us with an audited personal income statement compiled by a reputable CPA firm which showed one time items had distorted his true income and cash flow. Therefore, this particular individual really did make some money and it was a one-time event he posted a loss. Thinking there was an outside chance this was something similar, I asked the banker if he had an audited income statement prepared by a CPA.

“Uh, no, he just has his tax returns” the banker responded.

Of course. The implication was I was just supposed to take this man on faith. I was literally to believe in magic, invisible money and the heroic Guardian Gnomes of the Bank Vault.

By now I was getting angry and tired. It was the same damn thing, over and over again;

Some real estate developer had an ill-thought out plan for a real estate project. The housing and economic data would prove it was doomed to failure. Bankers blinded by their greed for commission would ignore the realities and risks, and fight to have the deal approved. We’d get a direct order to write it up anyway, but when we’d try to analyze it, we were guaranteed to never have the documentation needed to analyze the loan. And now, not only did I have grossly inadequate documentation, I was to ignore what documentation I did have. I was to ignore the losses on this individual’s tax returns and just trust he was making lots of money or whatever else he wanted to tell me. I’d rather believe in the sword-making Federal Reserve Fairies.

Now visibly losing my patience, I asked the banker in a somewhat stern tone,

“How are we supposed to know what his cash flow is then? How am I to measure his ability to pay back this loan? How am I supposed to write up this loan? I can’t do this unless I get more documentation.”

He could hardly argue, even if his sole interest was getting a commission. Aramis had such a lack of needed documentation, plus the fact he was losing money according to his dated tax returns, it almost necessitated, even by the banker’s standards, we get more documentation. He said he’d put in a call and see what updated information he could get.

A week had gone by and as usual we did not receive any new documentation. However, instead of sending us his tax returns, Aramis himself was going to come to visit and talk to us about his real estate deal and answer any questions we might have. Returning to the airplane analogy, this would be like needing wings for a plane, and instead of the manufacturer sending us the actual wings, a representative would come to our office and talk about wings. Talking about wings would presumably be enough then to get the plane up in the air and flying. Of course it wouldn’t. All it would do is waste my time. I didn’t need Aramis to talk to me about a deal. I didn’t need Aramis to explain to me how his twin homes were different. I didn’t need Aramis to explain how he was making money. I needed Aramis to prove it. And the fact he wasn’t sending any documentation, audited or otherwise, meant I was going to have to suffer through another sales pitch, interweaved between stories of boat parties, golf trips, Viagra and the baby boomer bar scene that largely wouldn’t change a thing.

The banker introduced me to Aramis and despite there being snow outside, Aramis was sporting his nice, dark tan. We sat at a conference table and there I listened pointlessly for 30 minutes about Aramis’ business, how he was super busy working on all these real estate deals and hadn’t gotten around to filing his 2006 tax returns. But it should be of “no concern, because those tax returns would show losses anyway, which were irrelevant because he was just trying to lower his income tax bill. And say, did you see Frank by the way? Yeah, they went golfing in Tempe last week and boy did they get hammered. Their waitress was a hottie. And when are you coming out to the cabin?”

And like any other meeting or high school economics class, it was humanly impossible to pay attention, let alone care. Aramis could have told me all the stories he wanted. He could have told me how his business worked in detail (to the point that it would make sense). He could have told me he just discovered platinum in his back yard. He could have told me he personally knew Jennifer Aniston and she had a weakness for video game-playing economists. None of it would matter because he still wasn’t providing any documentation to back it up. The loan I was looking at was for a real estate development, plain and simple. He wasn’t able to prove to me he could pull it off, plain and simple.

The meeting concluded and I bid him farewell. I returned to my desk with no more information than I had before I went into the meeting. But ten minutes later, the banker came down and said,

“What did you do?!”

Confused, thinking there was nothing I could have possibly done, I asked,

“What? What did I do?”

“Aramis came all the way out here to talk about his business and you didn’t even act like you were interested,” he said. “You just completely ignored him!”

The banker was right. Not only did I act like I wasn’t interested, I genuinely was not interested. And while I did not completely ignore him, I wish I could have. For while we could have argued about civil pleasantries and standard banking etiquette, when it came to interacting with potential clients, all of that was irrelevant because there was no loan there to be made. Aramis was balking and was outright, albeit subtly, refusing to furnish us with the information we needed to do the loan. He was hiding something, and no matter how much the banker wanted to hound me or pressure me into approving this loan, I couldn’t underwrite it even if I wanted to.

But then came the stroke of genius that earned my hat tip to Aramis. His second skill; his ability to lay a guilt trip. Frustrated the banker said,

“Look, I just talked to Aramis and you don’t understand. Aramis is one of my best clients. For him to take the time to come talk to us is enormously generous on his part. And you did not even take the time to get to know him or learn about his business and that made him very upset. If you don’t talk to him or at least look at this loan, then he’s seriously thinking about taking his business to another bank.”

The irony and hypocrisy were staggering on so many levels.

First, if Aramis wanted to take his business to another bank, then fine, let him go. Part of the free market is competition. And you hope to outdo your competitors so you get a larger market share and thus make more profit. Therefore, not only do you strive to become the best, but if there is something you can do (legally) to weaken your competitors, then you certainly do it. And here was the perfect opportunity to weaken one of our competitors. He was the perfect Trojan horse. Aramis was a bad client and a bad loan. Every indication in the housing market and economy suggested a housing bubble and subsequent collapse, if it wasn’t occurring already. Aramis, completely unable to prove his ability to not only sell these twin homes, but personally guarantee the loan, meant some unlucky sucker of a bank would end up holding his worthless development in foreclosure and would be bleeding cash to float it. If we passed on this loan and a bank with lesser quality and credit controls took it, we just delivered a blow to our competition. If he wanted to pick up his toys and go home, let him.

Second, the “honor” and “privilege” to be in the presence of the great Aramis was a joke. The reason why is, when it comes to lending, it works the other way around. If there was anybody to be humble and kneeling it was him. He was the one asking us for money. And typically when you ask to borrow money you do so in a humble manner. You don’t bark orders or demand to be given a loan like a suburbanite princess demands to be given a convertible Cabriolet. Furthermore, the reality is if you are the one who wants to borrow money, then you are the one who has to prove you can pay it back. The arrogance of Aramis to not only refuse to furnish us with information that would prove his ability to pay back the loan, but his insistence we trust his word, was laughable.

Finally, if Aramis was such a big time real estate mogul, what in Heaven’s name was he doing dealing with a small time bank like us? If he was indeed that great and big of a player, then he would have been poached long ago by much larger banks that could lend him much larger amounts of money, and probably on better terms. The truth is he was a client this relatively new banker brought over from another small time bank and was an absolute nobody. Didn’t matter what he said he was or what he said his business did; none of the documents proved it. All they proved was he was a nobody. And a nobody that was losing money."

So buy the book already!


Anonymous said...

Funny I was just reading this quote by Thomas Sowell (from Basic Economics) not more than 2 hours ago:

"Honesty is more than a moral principle. It's also a moajor economic factor. While gov't can do little to create honesty directly, in various ways it can indirectly either support or undermine the traditions on which honest conduct is based. This it can do by what it teaches in its schools, by the examples set by public officials, or by the laws that it passes. These laws can create incentives toward either moral or immoral conduct. Where laws create a situation where the only way to avoid ruinous losses is by voilating the law, the government is in effect reducing public respect for the laws in general, as well as rewarding specific dishonest behavior. Advocates of rent control, for example, often point to examples of dishonest behavior among landlords to demonstrate an apparent need for both rent control itself and for related tenants' rights legislation. However, rent control laws can widen the differences between the value of a given apartment building to honest owners and dishonest owners. Where the costs of legally mandated services - heat, maintenance, hot water - are high enough to equal or exceed the amount of rent permitted under the law, the value of a building to an honest landlord can become zero or even negative. Yet, to a landlord who is willing to violate the law and save money by neglecting required services, or who accepts bribes from perspective tenants during a housing shortage under rent control, the building may have some value"...Landlords willing to resort to arson may find the building most valuable of all if they can sell the site for commercial or industrial use after..."

Anonymous said...

I once goaded a similar nobody into buying a property that was in default.

He was pretty well known around town as a poser but the banks kept dealing with him. I told his agent "I see losers like this all the time. They make offers so they can tell their buddies that they've for X number of deals in the works - but they never close. He's a gutless wannabee so tell him to quit wasting my time."

The agent later told me that he passed this along to his client pretty much word for word as he felt the same way after 7 or 8 failed deals. The client went ballistic and to "show that c**ksucker" he actually closed.

Needless to say we didn't offer financing so he ended up paying about 85 bps too much, held the property for 6 years (it never cash flowed)and then sold it for a loss of about 15%.

Hot Sam said...

I just finished reading your book and I enjoyed it very much. The personal and colorfully told anecdotes about guys like Aramis and Zorba were enlightening.

If anyone is still sitting on the fence or procrastinating, just buy the book - you'll enjoy it. And then you can give it to someone else to read - pay it forward. It's likely more entertaining than most Hollywood films being produced nowadays.

Andrew L said...

Unrelated, but as soon as I saw this, I thought of you.

Anonymous said...

"So buy the book already!"

Ok, ok, ok. Just now ordered it from Amazon, I'll be looking for it in the mail.

Seriously, that excerpt was really entertaining. I'm looking forward to reading the rest of your book.