Making Money From Bad Loans

Tom Wolfe writes in A Man in Full:

The Male Battle was about to begin! But even that much explanation would have been beyond him.

There were a dozen men at the PlannersBanc end of the table. But the show was all Harry Zale’s. Harry, who was about forty-five, had a big jowly round head with a thin top dressing of black-and-gray hair combed straight back and a chin that swelled out like a melon. He was one of those mesomorphs who have short arms and thick chests and torsos. But for what he did, Harry Zale looked perfect. He was a workout artiste, and the workout artistes were the Marines, the commandos, the G.I. Joes of commercial banking. Or maybe the term should be D.I., for drill instructor, since Harry liked to refer to what was about to take place not as a workout session but as "boot camp."

Presently Harry lifted his big chin. He sighted Croker down his nose and let his gaze linger . . . and linger . . . and linger . . . without saying a word . . . the way a father might lead into a man-to-man talk with a boy who knows he’s been bad. And then he said in a high-pitched, rasping voice, "Why are we here, Mr. Croker? Why are we having this meeting? What’s the problem?"

Oh, Peepgass loved this part of Harry’s workout sessions the rude, grating, condescending way they started off! This was why a workout artiste like Harry Zale was known as an artiste! This was artistry. This was boot camp in the PlannersBanc Tower.

Croker stared at the artiste. Then he turned and looked past Peaches toward his chief financial officer, a young but dour presence named Wismer Stroock, probably not much more than thirty, who wore glasses with rectangular titanium frames and had pale skin, a heavy five o’clock shadow, and the sunken cheeks and stringy neck peculiar to compulsive joggers. Croker smiled at Stroock in a smirking way, and this smile said, "Hey, what kind of cute little stunt is this supposed to be? Who is this character? What is this why are we here bullshit?"

From India:

THE much-maligned non-performing assets (NPAs) of Indian banks are poised for a major makeover with the RBI paving the way for the sale of bad loans between banking and non-banking financial institutions.

The barter of NPAs for securities was already being done, albeit in a limited fashion, via the euphemistically named Asset Reconstruction Company (India) Limited (ARCIL). Now the gates have been thrown open for banks, non-banking financial corporations (NBFCs) and other financial institutions to create a thriving secondary market for bad loans.

Why do some banks, especially those in the public sector, appear all-too-eager to offload their bad loans?

How do asset reconstruction companies such as ARCIL fare vis-à-vis other financial institutions entering the bad loans business?

Since no "for-profit" organisation would acquire a portfolio of bad loans unless it fetches good returns, what draws the NBFCs, especially multinationals, to bad loans, somewhat like vultures to cadavers?

Meeting NPA targets and circumventing a protracted, pothole-ridden legal resolution process for debt recovery are only a few reasons for banks to dust NPAs off their books by taking recourse to ARCIL or NBFCs. The adoption of the Basel II framework by the RBI requires banks to provide for more capital to cover the cost of defaulted loans. Banks can immediately lower their regulatory capital requirement by jettisoning such non-performing loans from their portfolios.

Most NPAs stem from large-scale commercial borrowings rather than such retail borrowings as home-loans or farm-loans. While we have seen the many facets of debt collection on retail consumer products such as credit cards and car loans, commercial loan recovery has been an elusive proposition for a while. Public sector banks were more or less paralysed by low empowerment levels, the glacial pace of our legal processes and political intervention.

By selling off NPAs to NBFCs, banks can not only wipe their slate clean of bad loans and cut their credit risk exposure, but also get hot cash in return for them.

Commercial loan rehabilitation is a mature industry in countries like the US where lenders employ specialist "loan workout officers" for transforming non-performing multi-million dollar loans into productive assets by negotiating with borrowers.

Being a loan workout officer is a highly remunerative profession for which courses and training programmes are conducted.

Students of that peerless chronicler of contemporary America, Tom Wolfe, would remember his modern epic, A Man in Full, which immortalised such "workout artistes" through Harry Zales, whose stock-in-trade is the art of deflating the ever-ballooning egos of big and mighty defaulters, like the protagonist Charlie Crocker, and making them eat out of his hands.

Given that the bad loans business in India is of the order of thousands of crores of rupees, it may not be outlandish to expect multinational NBFCs to emulate our airlines importing CEOs and bring in expatriate workout officers from abroad to work on their portfolio acquisitions here.

If and when that happens, India’s Charlie Crockers can look forward to something like a blind date with their comeuppance.

Todd writes:

A classic text among those of us who work in the bankruptcy world is the legendary chapter "The Saddlebags" from Tom Wolfe’s book A Man In Full. The chapter describes with Wolfe’s typical style the workout negotiations of a commercial real estate deal gone south. The language is spicy but the mental image is hilarious and compelling.

I just discovered that scene is available as a book excerpt on line here. Enjoy, if this is your sort of thing. (I should add, keep in mind that this is a work of literature, so I mean "enjoy" in a Tom Wolfe over the top sort of way.)

The excerpt reminds me of a story back when I was in practice (perhaps apocryphal). As the story goes, the bankruptcy lawyers were constantly bugging the real estate lawyers to introduce us to their contacts at the banks so that the bankruptcy lawyers could develop client contacts inside the bank. Finally one of the real estate guys fessed up, "Look, taking you guys to a real estate closing is like taking a divorce lawyer to a wedding. The last person you want to meet is a bankruptcy lawyer when you’ve just signed a deal." A funny line, the spirit of which is captured in "The Saddlebags."

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (, he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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