Edward looked around at the others in the room and noticed his mother had gone pale.
“What’s the matter, Mom?” he asked.
She responded with a dismissive wave of her hand. “Nothing, son.”
Edward looked back at the television and listened to the anchorman.
“The seventy-year-old Broad Street National Bank’s capital base deteriorated precipitously over the last twelve months, according to the FDIC. The less capital a bank has, the weaker the bank is.
“Broad Street National Bank’s closure is not good news for the Philadelphia area. It has been a big supporter of local businesses and a generous contributor to local charities. The bank has almost eight hundred employees.”
Edward handed the remote to Johnny Scarfatti and turned to Nick. “That explains things pretty well, doesn’t it?”
“Yeah.” Nick looked worried.
“What’s wrong?” Annie asked.
Nick momentarily shook his head, seemingly gathering his thoughts. He waved a finger at Edward, still appearing to collect himself. “When you talk to Paul tomorrow, you should ask about what happens now to our loans at Broad Street National Bank. That news guy said most of the bank’s assets had been sold to Folsom Financial. What rights does Folsom now have regarding our loans? What about our deposits? We had almost $3 million in our accounts in Broad Street as of the close of business on Thursday. We—” Nick stopped and, after a few seconds, said, “Our receipts on weekends run about $600 thousand. We need to tell our managers to hold the receipts. No deposit drops in Broad Street National Bank over this weekend. We should have our armored car company deliver the receipts to us here. We’ll put them in our vault.”
“Why?” Katherine asked, her brow knitted and her eyes narrowed.
“I’ve heard too many horror stories about bank takeovers. I don’t know Folsom Financial, but they could …”
“What?” Edward demanded.
“Let’s wait until we meet with Paul tomorrow, Eddie.”
Katherine left the meeting and walked outside. She felt as though a massive hand gripped and squeezed her lungs. She reached to turn the key in the ignition but paused to think about Gerald Folsom’s role in all of this. It made no sense. First, Frank had gotten into business with Folsom. Coincidence? Maybe. Now, the man owned the bank that held the loan on their business and that bank was playing very rough with her son. Another coincidence? Unlikely.
She reflected on the last time she’d seen Folsom, before she and Frank had married, while Frank was overseas with the Army. She and two girlfriends had been out to dinner, celebrating Katherine’s engagement to Frank. They had moved to a club after leaving the restaurant. That’s where Folsom had homed in on them like a heat seeking missile on a target. Katherine’s girlfriends were single and weren’t averse to Folsom’s attention. He was tall, blue-eyed, and well-built, with jet-black hair and a roguish reputation. But Folsom was only interested in Katherine.
She ignored Folsom’s sexual banter for a short while and then called it a night. She went outside to her car and reached to open the car door, when someone grabbed her by the shoulder and spun her around, pinning her to the car. Folsom!
“I wondered how long it would take you to dump your loser friends,” he said.
She’d gawked at him as though he were an alien from another planet. “Get lost,” she’d said.
He yanked her to him and shoved his mouth onto hers. She struggled, driving her knee into his crotch. Folsom cried out and dropped to the ground as though he’d been poleaxed.
“You bitch!” he groaned.
Katherine opened her car door and drove off, thinking she’d seen and heard the last of Gerald Folsom.
But Folsom had begun calling her, stalking her. She found threatening notes on several occasions; her car tires were slashed twice. After weeks of harassment, she filed a restraining order against the man. Katherine never heard from Folsom again, and there was no more vandalism. She never told Frank. She felt there was no point after Folsom seemed to drop off the face of the earth. But now, after all these years, Folsom had resurfaced.
CHAPTER SIX
“How’s the transition going?” Gerald Folsom demanded over his cell phone.
Folsom’s Chief Financial Officer, Sanford Cunningham, blew out a loud stream of air that whistled in his boss’ ear. Cunningham had worked for Folsom for twelve years, handling three bank transactions for Folsom Financial Corporation in that time. A man of medium height and weight, with a brush cut, acne-pitted skin, and cold-blue penetrating eyes, he was Folsom’s bulldog. “These takeovers are always dicey,” Cunningham said, “but from my experience, it couldn’t be better.”
“Be specific,” Folsom ordered.
“Boss, this bank is a bird’s nest on the ground. You’ll remember July 15, 2011, as the day your net worth grew dramatically. As we determined during our due diligence, the loan portfolio is in great shape. The Feds took it over because they determined that the collateral is below the loan balance on a large number of the bank’s commercial real estate loans. And they’re assuming real estate values will continue to decline, so the loans will only be further under water as time goes on. Hell, the regulators are presuming that every city in the country will be another Las Vegas or Phoenix, with their real estate values plummeting. But most of Broad Street’s borrowers are as good as gold, never missing a payment. So, even though the regulators made the bank write down the loans based on their estimated real estate value, the bank’s loan delinquency rate is almost non-existent. Its president knew what he was doing when it came to lending.”
“Any problems with the bank’s IT systems?”
“No, they’re all updated and functioning, so the transition to our systems should be seamless.”
“What about the deposits?”
“As you know, we paid two point four percent for all of the deposits. Hell, if we do nothing else, we can invest the deposits in Treasuries and make money with zero risk. We’ll send a notice to all depositors next Friday advising them we’re going to reduce the rates we’re paying on CDs to one point two percent. That will save about $17 million in annual interest expense. Then we’ll bump up fees on checking accounts and reduce the interest paid on those accounts. That should generate another $37 million in fees and interest savings.”
“We’ll see a mini-run on the bank when those letters go out,” Folsom said, not really worried. “Especially the retired customers. They’ll cash in their CDs and take their money to some other bank that’s paying a little more interest.”
“We’ve got plenty of liquidity even if that happens. And there’s always the Federal Reserve. We can borrow overnight Fed Funds at near zero and lend it out at four and a half to five percent.”
Folsom chuckled.
Cunningham continued, “Our lawyers will start calling the owners of the real estate where our branches are located. We’ll renegotiate the leases. Probably cut the rent in half. That’ll save $60 million over the next ten years.”
“That’s one of the things I’ll never understand,” Folsom interjected. “How can the federal government take over a bank and then pass on the right to the new owners to renegotiate all of the bank’s contracts? Leases, Certificates of Deposit, vendor contracts. They screw the original owners of the bank, the depositors, and the bankers’ vendors. What a cluster fuck!”
“I assume you’re not complaining about how the system works,” Cunningham said with a laugh.
“Sanford, my boy, just the opposite,” Folsom answered. “God bless my Uncle Sam.” Then he added, “When can you get me a summary of the loan portfolio?”
“I’ll email it to you on Monday afternoon. Loan amounts, interest rates, loan-to-value ratios, collateral descriptions, delinquencies, and borrower information.”
“That’s where the big bucks are hiding, Sanford. We buy the bank’s deposits at a slight premium and buy the loans from the FDIC that we want and tell them to keep the stuff we don’t wa
nt. And, according to the loss-share arrangement we have with the FDIC, if we experience any losses on any of the loans we buy, they’ll cover eighty percent of those losses.”
Folsom smiled. “And the losses are calculated against the actual loan balances, not against the discounted price we pay for the loans. It’s heads I win, tails you lose.”
“I did a quick and dirty analysis of the commercial loan portfolio,” Cunningham said. “The current appraisals in the bank’s files show that, as a result of the economic downturn, the commercial real estate backing up the bank loans is now worth only eighty-five percent of what it was when the loans were originally closed. So, for example, a million dollar property is now appraised at $850,000. That’s in line with what we have seen in value depreciation across this market. But the Feds made Broad Street Bank write down their loans to an average of seventy-five percent of current loan balance. And the original loans, on average, were advanced at an average of only sixty percent of original appraised value. Therefore, if Broad Street loaned a borrower $600,000 against a million dollar property, the Feds now declare that the loan is worth only seventy-five percent of $600,000, or $450,000. Even though the collateral behind the loan is valued at $850,000. These loans are solid. And if a loan does go bad, we can always sell the property—the collateral —and pocket a profit.”
“Sandy, what I’m really interested in knowing are which real estate loans mature in the short term.”
“Just like with the other banks we bought,” Cunningham said. “I’ve already anticipated that. You’ll have that information Monday.”
SATURDAY
JULY 16, 2011
CHAPTER SEVEN
Attorney Paul Sanders arrived at Winter Enterprises’ offices at 9 a.m. sharp on Saturday. He was still the distinguished-looking man he’d been two decades earlier. Still slim and elegant, but grayer, with thinning hair. Even on a Saturday, he wore a suit and tie. Nick met him in the lobby and led him to Edward’s office where Katherine was just leaving to tour the restaurant locations.
Dressed in khaki slacks and a lime-green polo shirt, Katherine looked model-perfect. As usual, Paul couldn’t take his eyes off her. That too, hadn’t changed.
Edward felt bad for Paul. It had always been obvious to him how the lawyer felt about his mother, and just as obvious was her lack of interest. “Call me if there are any problems at any of the restaurants,” Edward said to his mother.
After Katherine left, the men sat down. “I assume you’ve reviewed all the loan documents, Paul,” Edward said. “Do we have any options?”
Paul shrugged. “A few. Your loan’s anniversary date is at the end of July. The 29th to be exact. The bank has the right to demand payment in full as of that date. But the bank has new ownership. Maybe they’ll want to extend the loan, which would take all the pressure off you to find alternative financing. But …”
“But what?” Nick pressed.
“I wouldn’t count on getting any relief from the new owner.”
“Why do you say that?” Edward asked.
Paul visibly swallowed. His face reddened. “I need to tell you something I should have shared with your mother twenty-two years ago.” Paul couldn’t seem to go on.
“What is it, Paul?” Edward asked.
“Could I have some water?”
Edward went to the mini refrigerator and pulled out a bottle of water. He gave it to Paul and watched him open the bottle and take a drink nervously. He waited until the lawyer put the bottle down on the edge of his desk and then asked, “What happened twenty-two years ago that has anything to do with the new ownership at Broad Street Bank?”
“Folsom Financial Corporation is owned by Gerald Folsom, the same man who put your father into a bunch of real estate deals back in the ‘80s. Your father and I had a lot of conversations about those deals. He was under huge stress because of the loans he’d taken out. I am convinced that stress caused the heart attack that killed him.”
“Did Folsom cheat my father?” Edward asked.
Paul shrugged. “I have no way of proving that. I do have my suspicions. But I found out after Frank died that Folsom took advantage of the situation. He bought your dad’s loans from the Resolution Trust Corporation at a deep discount after the federal government took over the bank where one of the loans was housed. He did the same with other of your dad’s loans at a couple banks. They were anxious to dump paper that looked bad. This gave Folsom control over the collateral behind the loans. By assuming loans whose balances had been deeply discounted, Folsom wound up owning one hundred percent of the real estate backing up those loans. He also captured your father’s eighty-five percent stock interest in First Savings Bank. Did he cheat Frank? As far as I know, not legally. But he sure didn’t deal ethically.”
“What’s the Resolution Trust Corporation?” Edward asked.
“An organization formed by the Feds to dispose of the assets of banks appropriated by the federal government. A vast number of banks and savings and loans were taken over by the federal government. In so doing, the Feds then not only had these financial institutions on their hands, but they had all of their assets: Billions and billions of dollars in loans backed by even more billions in collateral behind those loans. They started dumping those loans on the market and selling the collateral at deep discounts. I knew a fellow who bought a pool of $100 million in unsecured notes from the Feds for $5 million. He wound up collecting $58 million from the borrowers on those notes. Not a bad return on $5 million. Most borrowers were perfectly willing to repay their loans. But, once the RTC took over banks, the borrowers often couldn’t find anyone to talk to about how to make their payments.
“Dumping real estate properties on the market at deep discounts only exacerbated the drop in value in the commercial real estate market that began with the passage of the Tax Reform Act of 1986. It took ten years for the real estate market to return to any sort of normality.”
“Sounds insane,” Edward said.
“Or corrupt,” Nick added.
“Could be both,” Paul said. “Frank didn’t live to see the worst of the effects of the tax act, but in 1988, he was already predicting a disaster, and a federal conspiracy. Whether he was correct or not about the conspiracy, the results were the same. The beneficiaries of the Tax Reform Act of 1986 were the super wealthy of the world, the only ones with the cash resources to buy up the discounted assets the RTC put up for sale. The losers were the middle class who couldn’t refinance their properties because of reduced property values or who lost their buildings, for example, when the real estate recession infected the rest of the economy and businesses failed and the property owners lost their tenants.”
In the funereal lull now overhanging the office, Paul added, “And history is repeating itself. Bear with me, because this is a bit technical, but it’s vital you understand why the banks are acting irrationally. The politicians in Washington, D.C., encouraged Fannie Mae and Freddie Mac to buy subprime loans because those politicans wanted to encourage universal home ownership, regardless of whether homebuyers could actually afford to buy. Then the Federal Reserve flooded the market with cheap money, keeping interest rates low to encourage borrowing on a monumental scale. Banks joined the party, making loans on the ridiculous assumption that property values would keep rising forever. Consumers were also part of the feeding frenzy, buying houses they couldn’t afford because they, too, thought property values would go up and up. But then property values stopped going up. Some of those subprime borrowers stopped paying their mortgage payments. When loan delinquencies started to rise and property values dropped, the capital markets froze.”
Paul sighed and took another drink of water, fiddling with the plastic cap. “The same thing is happening to you that happened to a lot of those borrowers. The quality of your, or anyone’s, credit is apparently irrelevant to the Federal regulators because the financial markets are so damaged. Then, the same federal government that started the problem in the first place now rides i
n and solves the problem. It creates TARP, TALF, stimulus programs, and myriad other programs, funneling money into the big banks and securities firms. Then they impose new lending and capital rules on banks, all banks, whether they took TARP funds or not. I can’t speak intelligently about how the rules have impacted the banks, or Broad Street National Bank specifically, but I can tell you, whether you call it the Resolution Trust Corporation, or the Federal Reserve, or the U.S. Treasury, the Feds are ultimately behind your problem today. They’ve disrupted the normal workings of the capital markets. And I will not be surprised to learn Gerald Folsom acquired Broad Street National Bank at a price much lower than the real value of the bank.”
“If armed people invaded a bank and stole all of the bank’s assets, you’d call that bank robbery,” Nick said. “What do you call it when your own government takes over a bank and hands the bank’s assets over to a guy like Folsom?”
Paul spread his hands in a frustrated gesture, saying nothing.
“Nick and I are going to meet with several bankers next week,” Edward said. “With our financial situation, we should be able to refinance our loans somewhere.”
“You should meet with whoever’s now calling the shots at Broad Street Bank, as well,” Paul suggested. “At least you might be able to learn something about what’s going on down there.”
CHAPTER EIGHT
Gerald Folsom knew the transition from Broad Street National Bank to the FDIC and then to Folsom Financial Corporation would effectively take place over the weekend. Folsom had already ordered his people to begin the process of “problem” loan disposition as soon as possible. That included getting rid of loans, even if they were paying as agreed, especially those with short-term maturity dates. The Feds had made it clear they wanted the bank to reduce its exposure to commercial real estate loans. Folsom rubbed his hands together. Disposing of those loans was where the big bucks would be made.
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