The Hawaladar

CHAPTER FOUR-2

“Yes, I would think so, Mr. Hart, but I must regrettably repeat that even if our discussions relative to the lending side of the bank get started by then, I feel certain they will definitely take more time than we have to cover today. Considering your recent arrival and the process you are overseeing with respect to changes in lending policies, procedures, and operations, etc., there is much we need to go over regarding the lending function here at Global United; and we have a substantial number of larger credit relationships about which we have questions. Based upon how all that goes we will no doubt also need to spend some time discussing the adequacy of the bank’s Allowance for Loan & Lease Loss Reserve.”

“Well, that’s a lot to discuss,” said Logan. So, maybe our lending people here really should go try to accomplish something constructive now until we need them later this afternoon. “

“Probably best,” added Trotter, “because there’s even a possibility we may not even be able to start our lending discussions until Monday if very much of the subject matter we plan to talk about this morning carries over into the afternoon. Unfortunately, to make matters worse with respect to how far we may get today, we examiners are going to have to call it quits sometime around mid-afternoon today to enable most of us to attend a special function this evening. So, we may not even get to the lending discussion today.”

“Sounds fine with me, if that suits you, Scott,” said Logan as a number of the bank’s senior lenders started exiting the room. He had been sincerely pleased to hear the depth at which Trotter and his examiners planned to look into the loan side of the bank. Deliberate was better as far as Logan was concerned. “And you’re right, Paul. As new head of lending here at Global United, the areas you mentioned are of significant interest to me also. I’ve been reviewing pretty much everything you mentioned as much as time has permitted since my arrival, but there have been only so many hours in the day in the short time I’ve been here at the bank. Your team’s independent review will perhaps be a big help in targeting future efforts. We’ll be glad to spend whatever time is required.”

Logan could tell from the look of consternation on Scott Kruse’s face that the bank’s CEO didn’t perhaps much share his enthusiasm. Generally speaking, Global United’s loan portfolio had thus far appeared to be of reasonably high quality to Logan, but vestiges of the past recession still plagued many financial institutions around the country with some still experiencing economic distress of one sort or another, and this was still of grave concern to bank regulators.

Beginning with the bursting of the residential real estate bubble in 2008 and 2009, the U.S. banking industry had entered a period of record bank failures with over five hundred institutions closing during the previous decade. Peaking with the failure of over one hundred and fifty institutions during 2010 alone, bank closings had tapered off to an insignificant level in recent years, but concerns remained for some major areas of exposure to risk in the industry. Commercial real estate loans for example had been particularly hard hit as a result of the recent COVID-19-related downturn; and that category of loans constituted a significant part of Global United’s balance sheet. So, Trotter and his OCC crew had zeroed in on that portion of the bank’s loan portfolio during their current review, and there was much to discuss.

Thus far, based on Global United’s own assessment of loan quality, it appeared as though the bank’s underwriting approach relative to commercial real estate and commercial operating loans had resulted in few non-performing assets to date. The OCC, however, was infamous for its stringent approach to loan grading, and there was always the possibility that regulators might take issue with the bank’s ratings on loans heretofore considered borderline substandard by Global United’s analysts. Scott’s trepidation hadn’t gone unnoticed by Trotter and his examining crew either.

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AS TROTTER had predicted, he and his team of examiners were able to dispense with numerous, minor concerns regarding various issues of safety and soundness by the end of the morning. They were just beginning their discussion of Global United’s handling of bank transactions covered by Federal Reserve Regulation O and the Financial Institutions Regulatory and Interest Rate Control Act—which deal with business between the bank and its principal shareholders, directors and executive officers—when it was decided to break for lunch. At Scott’s suggestion, lunch had been ordered in so that the OCC could continue its review right on through the noon hour. Everyone served themselves, and then Trotter began his discussion of the OCC’s review of insider transactions while the group was eating.

“As hopefully most of you are aware,” began Trotter, “FRB Reg O and FIRA establish much stricter requirements for bank-related business with Directors, Executive Officers and bank shareholders with either direct or indirect ownership of ten percent or more of the bank’s outstanding stock, and during the past few years of regulatory oversight, past and present Comptrollers of the Currency have been quite insistent that this area of concern be closely reviewed. To that end—and I’m not sure how you would like to handle it, Scott—I do have some questions I would like to discuss regarding the bank’s handling of its various relationships of business entities owned or controlled by your board chairman and largest shareholder, Mr. Tariq Nasir. He is, as you know, the ‘insider’s insider’ here at Global United, whether it’s by way of his official capacity here at the bank or his controlling stock interest in the bank and other related entities.”

“Why, what’s wrong there?” Scott Kruse acted incredulous, becoming noticeably animated for the first time since the meeting began. “We’ve always tried to be quite circumspect with everything we do relative to Mr. Nasir’s personal and business relationships.”

Trotter was somewhat taken aback by Scott’s defensiveness, a reaction seemingly shared by just about everyone in the room, including Logan. Scott’s red face, and the near panicked sound of incredulity in his voice suggested the examiners finally had his full attention for the first time that morning.

“There’s no cause for alarm, Mr. Kruse. These are, by and large, routine questions that I’m certain you’ll be able to answer easily, but I do need to ask them.” During a long, storied career as a regulator for the OCC, old Paul Trotter had seen this same reaction from many a bank CEO when faced with a need to scrutinize principal insiders to whom they perhaps answered, like Global United’s Mr. Nasir. It was the type of reaction, however, that always made him immediately suspicious. The CEO of a bank closely held by one individual, such as was the case between Scott Kruse and Nasir, sometimes only kept his or her position by staying in the best of graces with that principal shareholder. It was a built-in potential for conflict of interest with which only the most forthright and principled of individuals were often able to contend. “Interestingly enough, I met Mr. Nasir early on in our examination when he was in the bank on some business,” continued Trotter, “and he seemed to be a very capable, straightforward businessman. Nevertheless, he and his various other companies do a great deal of business with Global United—as they certainly should if all is handled according to regulation—and I would simply like to better understand his organization, what parts of it do business with the bank, and how the bank handles that business with respect to the requirements of Reg. O, etc.”

“Fine, what would you like to know?” the still obviously perplexed Scott Kruse snapped back.

“Well, from what I can tell, Mr. Nasir appears to handle most all of his business operations through a holding company he and his family own by the name of AmeriPAK, Inc., I believe it is,” said the old regulator, looking down at his notes. “The company appears to have a rather complex corporate structure consisting of a number of subsidiaries that are, shall we say, interestingly eclectic in nature.”

“That’s correct,” responded Kruse, still looking a bit perplexed by the subject at hand.

“Yes, well, from what we’ve been able to determine from an organizational chart we found in an accountant-prepared statement in the AmeriPAK file,” said Trotter, “the company’s subsidiaries would appear to include six corporate entities: Aurora Development, Inc., a Chicago real estate development company that Mr. Nasir must have purchased from his father-in-law’s estate some years ago; Aurora Transportation, Inc., a domestic trucking and international shipping firm; Aurora Tech, Inc., a computer hardware and software provider; AuroraNet, Inc., a regional Internet service provider; Aurora Vending, Inc., a company that apparently owns and very successfully operates vending machines and electronic game rooms at a multitude of locations throughout the Chicago area; and finally PAK-West, Inc., an international precious metals operation that also owns a number of well-located, high-end jewelry stores in several major cities around the country. They’re named Crescent Jewelers, I believe. All the companies except for the technology outfit seem to be rather profitable operations, and all the companies, including the technology concern, have very strong balance sheets. Each of them also appears to have established deposit and loan relationships with the bank. Are we correct in all of that?”

“Sounds correct,” Scott responded, “but what do you need to know about those relationships that you maybe don’t already? There should be fairly complete write-ups in all the files.”

“Yes, we found the very write-ups to which you refer, and they were quite helpful.” Trotter was trying not to be confrontational. “And from our review, it would appear as though the bank has accommodated AmeriPAK and each of its subsidiaries with fairly substantial lines of credit.”

“Absolutely! And that’s as it should be, wouldn’t you think, Paul, seeing as how Mr. Nasir owns most of this bank?” Scott added, even more defensively.

“Look, again no need to be concerned here, Mr. Kruse. We’re only recapping our observations here with respect to credit arrangements. We have found that when the total of the lines of credit granted all the AmeriPAK companies are aggregated—as they must be since Mr. Nasir is near sole owner of all AmeriPAK, Inc. shares and a major shareholder of Global United as well—the resulting number would exceed the regulatory lending limit as a percent of bank capital were it not for the fact that you correctly arranged for participations of the excess credit authorizations or overlines to various upstream correspondent banks. So, no problems appear to exist in our initial review of the credit side of these relationships.”

“Well, we’re glad to hear that,” Scott retorted with an air of condescension, “but I’m not surprised. We have always taken great care in that regard.”

“We figured you would be.” Trotter smiled sympathetically. “We do still have a few routine questions regarding some covenants in your loan agreements with the AmeriPAK group, but aside from that I would repeat that we have little problem with how Global United has handled the credit side of its AmeriPAK relationships.”

“Well, if I might interject, I’m glad to hear that too,” added Logan. “AmeriPAK, Inc. is one of our larger, more involved credit relationships.”

“Yes, I’ll bet you are, Mr. Hart.” Trotter hesitated a moment while making prolonged eye contact with Scott and then looked back at his notes before continuing. “And we would essentially be done with AmeriPAK, were it not for the fact that it appears we also need to discuss their deposit relationships and some services the bank provides Mr. Nasir’s companies on the operations side of the bank.”

“What might I ask could be of concern with the AmeriPAK group of deposit accounts?” Scott asked, shaking his head in rekindled exasperation. “They’re simply standard business checking accounts set up with sweep features to accommodate some related cash management arrangements. It’s all an automated function similar to that which we’ve established with a multitude of other commercial customers. We’ve always been quite careful to charge them our standard fees, and to show no preference with respect to overdraft procedures, etc.”