Dumb and Dumber financing

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This is an old story -- about 25 years old -- but it illustrates some of the reasons for the failure of our financial system. Years ago I represented a major national commercial lender -- it's 'out of business' now having merged into one of the megabanks. I'll call it 'BlahCorp' and hope it's not someone's real name, and change names of others as well.

BlahCorp was, at the time, headquartered in Chicago. It specialized in commercial loans for trucks (18-wheelers) and heavy equipment (think Caterpillar, etc.) and so forth. Typically, the dealer selling the item helped the customer get the financing and had some stake in the ability of the customer to meet the payments (in the financial world this is called "recourse" financing)

SwampCorp was an equipment dealer -- earth moving equipment, cranes, all that big stuff you see on highway construction, mining, commercial buildings, etc. Heavy Lifting Inc. was a startup crane contractor in the area and bought $1Million in cranes from SwampCorp (probably $2.5+M now). Jane was President and sole shareholder of Heavy Lifting and submitted the documents to BlahCorp for the financing.  Due to the size of the loan, it required approval of the Senior Vice President of Finance in Chicago; on the corporate totem pole he was #3 and had 25 years 'experience'.

Jane submitted financial statements for Heavy Lifting showing that the corporation had about $20,000.00 in equity, at cost value (not liquidation value).  Jane had to personally guarantee the loan so submitted a financial statement showing her net worth of $535,000.00:  the value of her stock in Heavy Lifting was $500,000.00; the sum total of equity in her other assets was $35,000.00 on a good day. 

Heavy Lifting filed bankruptcy and I was hired to protect BlahCorp.  The Sr. VP flew to Roanoke for the hearing.  I looked at the financing and said "I'm only a lawyer, but I don't understand why you made this loan" He responded that the 'guarantors financial statement was strong'.  My response was in the early days of being Rossiferous:  "Nonsense;  she shows $500,000.00 as value of Heavy Lifting, but it's financial statement shows only $20,000.00; didn't you notice that?"

"Um, we never looked at it that way"

D'OH

And the industry got dumber and dumber since.
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