The Moneychangers

"Jesus!" Patterton got up from his desk and took a turn away. He muttered to himself, "SuNatCo! Jesus Christ, SuNatCot" Swinging back on Alex, he demanded, "What about our loan? Fifty million."

"I checked. Almost the full extent of the credit has been drawn." "The compensating balance?" "Is down to less than a million."

There was a silence in which Patterton sighed deeply. He was suddenly calm. "You said you had strong reasons. You obviously know something. You’d better tell me what."

"It might be simpler if you read this." Alex laid the Jax report on the president’s desk.

"I’ll read it later," Patterton said. "Right now, you tell me what it is and what’s in it."

Alex explained the rumors about Supranational which Lewis D’Orsey had passed on, and Alex’s decision to employ an investigator Vernon Jax.

"What Jax has reported, in total hangs together," Alex declared. "Last night and this morning I’ve been phoning around, confirming some of his separate statements. All of them check out. The fact is, a good deal of what’s been learned could have been discovered by anyone through patient digging except that no one did it or, until now, put the pieces together. On top of that, Jax has obtained confidential information, including documents, I presume by”

Patterton interrupted peevishly, "Okay, okay. Never mind all that. Tell me what the meat is." "I’ll give you it in five words: Supranational is out of money. For the past three years the corporation has had enormous losses and survived on prestige and credit. There’s been tremendous borrowing to pay off debts; borrowing again to repay those debts; then borrowing still more, and so on. What they’ve lacked is real cash money."

Patterton protested, "But SuNatCo has reported excellent earnings, year after year, and never missed a dividend."

"It now appears the past few dividends have been paid from borrowings. The rest is fancy accounting. We all know how it can be done. Plenty of the biggest, most reputable companies use the same methods."

The bank president weighed the statement, then said gloomily. "There used to be a time when an accountant’s endorsement on a financial statement spelled integrity. Not any more."

"In here" Alex touched the report on the desk between them "are examples of what we’re talking about. Among the worst is Greenapastures Land Development. That’s a SuNatCo subsidiary." "I know, I know."

"Then you may also know that Greenapastures has big land holdings in Texas, Arizona, Canada. Most of the land tracts are remote, maybe a generation from development. What Greenapastures has been doing is making sales to speculators, accepting small down payments with hedged agreements, and pushing payment of the fun price away into the future. On two deals, final payments totaling eighty million dollars are due forty years from now wed into the twenty-first century. Those payments may never be made. Yet on Greenapastures and Supranational balance sheets, that eighty million is shown as current earnings. Those are just two deals. There are more, only smaller, utilizing the same kind of Chinese accounting. Also, what’s happened in one SuNatCo subsidiary has been repeated in others."

Alex paused, then added, "What all of it has done, of course, is make everything look great on paper and push up unrealistically the market price of Supranational shares."

"Somebody’s made a fortune," Patterton said sourly. "Unfortunately it wasn’t us. Do we have-any idea of the extent of SuNatCo borrowing?"

"Yes. It seems that fax managed to get a look at some tax records which show interest deductions. His estimate of short-term indebtedness, including subsidiaries, is a billion dollars. Of that, five hundred million appears to be bank loans. The rest is mainly ninety-day commercial paper, which they’ve rolled over."

Commercial paper, as both men knew, were IOUs bearing interest but backed only by a borrower’s reputation. "Rolling over" was issuing still more IOUs to repay the earlier ones, plus interest.

"But they’re dose to the limit of borrowing," Alex said. "Or so Jax believes. One of the things I confirmed myself is that buyers of commercial paper are beginning to be wary."

Patterton mused, "It’s the way Penn Central fell apart. Everybody believed the railroad was blue chip the safest stock to buy and hold, along with IBM and General Motors. Suddenly, one day, Penn Central was in receivership, wiped out, done."

"Add a few more big names since then," Alex reminded him.

The same thought was in both their minds: After Supranational, would First Mercantile American Bank be added to the list?

Patterton’s ruddy face had gone pale. He appealed to Alex, "Where do we stand?" No pretense of leadership now. The bank president was leaning heavily on the younger man.

"A lot depends on how much longer Supranational stays afloat. If they can hang on for several months, our sales of their stock today might be ignored, and the breach of the Federal Reserve Act with the loan may not be investigated closely. If the breakup happens quickly, we’re in serious trouble with the SEC for not revealing what we know, with the Comptroller of Currency over abuse of trust, and, over the loan, with the Fed Reserve. Then, I need hardly remind you, we’re facing an outright loss of fifty million dollars, and you know what that will do to this year’s earnings statement, so there’ll be angry shareholders howling for someone’s head. On top of that there could be lawsuits against directors."

"Jesus!" Patterton repeated, "Jesus H. Christ!" He took out a handkerchief and mopped his face and egg-like dome.

Alex went on relentlessly, "There’s something else well have to consider publicity. If Supranational goes under there will be investigations. But even before that the press will be on to the story and do probing of their own. Some of the financial reporters are pretty good at it. When the questioning starts, it’s unlikely our bank will escape attention, and the extent of our losses will become known and publicized. That kind of news can make depositors uneasy. It could cause heavy withdrawals." "You mean a run on the bank! That’s unthinkable."

"No, it isn’t. It’s happened elsewhere remember Franklin in New York. If you’re a depositor, the only thing you care about is whether your money’s safe. If you think it might not be, you take it out fast."

Patterton drank more water, then slumped into his chair. If possible, he looked even paler than before.

"What I suggest," Alex said, "is that you call the money policy committee together immediately and we concentrate, during the next few days, on attaining maximum liquidity. That way, we’ll be prepared if there’s a sudden drain on cash." Patterton nodded. "All right."

"Apart from that there’s not much else to do but pray." For the first time since coming in, Alex smiled. "Maybe we should get Roscoe working on that."

"Roscoe!" Patterton said, as if suddenly reminded. "He studied the Supranational figures, recommended the loan, assured us everything was great."

"Roscoe wasn’t alone," Alex pointed out. "You and the board supported him. And plenty of others studied the figures and drew the same conclusion." "You didn’t."

"I was uneasy; suspicious, maybe. But I had no idea SuNatCo was in the mess it is."

Patterton picked up the telephone he had used earlier. "Ask Mr. Heyward to come in." A pause, then Patterton snapped, "I don’t care if God is with him. I need him now." He slammed down the instrument and mopped his face again.

The office door opened softly and Heyward came in. He said, "Good morning, Jerome," and nodded to Alex coolly. Patterton growled, "Close the door."

Looking surprised, Heyward did. "They said it was urgent. If it isn’t, I’d like to…" "Tell him about Supranational, Alex," Patterton said. Heyward’s face froze.

Quietly, matter-of-factly, Alex repeated the substance of the fax report. His anger of last night and this morning anger at shortsighted foolishness and greed which had brought the bank to the edge of disaster had left him now. He felt only sorrow that so much was about to be lost, and so much effort wasted. He remembered with regret how other worthwhile projects had been cut back so that money could be channeled to the Supranational loan. At least, he thought, Ben Rosselli, by death, had been spared this moment.

Roscoe Heyward surprised him. Alex had expected antagonism, perhaps bluster. There was none. Instead, Heyward listened quietly, interjecting a question here and there, but made no other comments. Alex suspected that what he was saying amplified other information Heyward had received himself, or guessed at. There was a silence when Alex was done.