Sunday, August 15, 2010

Good Banker, Bad Banker

Chicago Tribune reporters Becky Yerak and Gerry Smith tell the tale of the Good Banker, gone Bad Banker:

Jeffrey Gonsiewski fancied himself sort of a modern-day Robin Hood at a time when consumers were becoming increasingly delinquent on their bank loans.The former vice president at First Security Trust & Savings Bank -- an Elmwood Park-based lender that's part of the [Rocky] Wirtz family conglomerate -- pleaded guilty on Wednesday to one count of federal bank fraud.

Gonsiewski, who was charged last month, admitted that he changed the terms of at least 100 loans for more than 50 customers to make it appear that their payments were current when in fact they were overdue.

"I thought I was helping the customer stay afloat, so to speak, as the times got bad, and that economically, it would improve and everything would go back to a normal situation. And those loans would be paid off, times would get better, other property would sell, the bank would not take a loss," he told the court on Wednesday.

His 'scheme to defraud' occurred from September 2004 through February 2009, the U.S. Department of Justice said. His actions caused the $220.6 million-asset bank to lose at least $5.5 million because the lender was unable to take timely action to collect on the delinquent loans and protect its assets.  In court on Wednesday, U.S. District Judge Elaine Bucklo asked Gonsiewski and his lawyer, Terrence LeFevour, about his motivation for altering documents to make it appear that customers' payments were current when he knew they were overdue.

'What my client has told myself and the government...many of these clients were going through difficult times, so he would create these loans in a way that he thought he was helping the clients and the bank by issuing them more money in situations where they would not have sufficient collateral or security to get these loans, always with the hope that they would pay off the loans, and, finally, when it came true and the bank did their examinations, they found these loans,' LeFevour told the court.

'It is my understanding, and it's been communicated to the government, I think a financial analysis would bear this out, that...there was no quid pro quo for these loans; he did not make any money from them, but he certainly was involved in the activities that allowed these loans to be created, to be issued, and to be funded.'

Then Gonsiewski himself addressed the court.

'I thought I was helping the customer stay afloat, so to speak, as the times got bad and that economically it would improve and everything would go back to a normal situation and those loans would be paid off, times would get better, other property would sell, the bank would not take a loss,'  he said.

Gonsiewski, 56, of Wood Dale, faces a maximum 30 years in prison and a $1 million fine, but a written plea agreement includes a federal sentencing guideline of 51 to 78 months in prison. The court also must order mandatory restitution.

First Security was founded in 1946. Its president is Rocky Wirtz, whose family also owns the Chicago Blackhawks hockey team and Wirtz Beverage Group. The family also has an interest in First National Bank of South Miami. First Security said it was 'disappointed in the conduct' outlined in the case. 'We are pleased the matter has been brought to a conclusion and are grateful for the assistance we received from the authorities,' said Earl Farkas, a Gozdecki Del Giudice Americus & Farkas LLP lawyer representing First Security.

First Security was well-capitalized as of March 31, but it lost $157,000 in the first quarter. Nearly 40 percent of its loans are seriously delinquent, up from nearly 20 percent in the same period a year ago.

The number of Chicago-area banks with Texas ratios of at least 100 percent in the first quarter stood at 38. The Texas ratio tallies up a bank's severely past-due loans and foreclosed real estate and compares them with the bank's core capital, typically shareholders' equity, and money set aside for potential loan losses. When the result exceeds 100, the bank has serious troubles.

As of the first quarter, First Security's Texas ratio was 111.
Betcha think I'm going to stick up for the Banker.  Not a chance.  This guy was as pernicious as any robber.  If the bank collapses, who pays?   He says his motives were pure, maybe, but aren't the motives of all thieves pure?  They just want to pay their bills, they just want to feed their kids, they just want to . . . Look, this is me.  I didn't pay my taxes, and when I fell into a hole, I hid from reality, I stopped filing, I stopped looking.  This is all seed-level dishonesty.   We can rationalize it, but it's wrong.

Previously I related the story of my friend who audited the Record story chain (back when such things existed) which was defrauded by its comptroller.  The comptroller was over reporting "returns" an aspect of "assets" that had the net effect of creating a positive impression on the operations bottom line.  The net effect was the collapse of the record chain.  The curious thing was, what was the comptroller's motive--there was no obvious impact on his compensation and surely the fraud was going to be "uncovered" or cause the firm's collapse. 

Conjecture lead us to believe that by making the chain appear more profitable than it was, the comptroller hoped to improve his compensation and possibly even move to a better position outside of this firm before his fraud was discovered. In that day and age, employee defalcations were customarily covered up because they tended to suggest poor overall management.  Which was precisely the case in the disaster of this retail chain which was owned and "operated" by a gentleman who thought he could tend his fortune from afar, a villa in the South of France. 

I did precisely the same thing with my business.  I thought I could operate a law practice by being good litigator and ignore my business responsibilities or entrust the responsibilities to someone with even less insight than I had. You would have thought this experience early in my career would have shown me otherwise.  Nope.

We see again and again where law firms, businesses of all size are victimized by just such thinking.  It really boils down to denial and dishonesty on the part of business owners.

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