Sympathetic Victims? Not Quite (Editorial)

My recent story about people who invested tens and hundreds of thousands of dollars in stock peddled by Darrell Lainhart of Sherwood included several sympathetic victims: A woman who needs the $30,000 her husband invested because he’s now in a nursing home with Alzheimer’s disease, a disabled veteran, a man who hoped to become a full-time missionary.

Contrast these victims with Bob and Katherine Shoulders, who have tried with some success to win sympathy since a foreclosure suit was filed against their business, Fayetteville Athletic Club, by the “trash-eating rat” who bought their loans from the Federal Deposit Insurance Corp.

The Fayetteville Athletic Club foreclosure has been the subject of a half-dozen different articles, including one in Arkansas Business back on March 9. At that time, the Shoulderses maintained that they were current in their payments on three loans totaling nearly $10 million when their lender, ANB Financial, was shut down by federal regulators in May 2008. But Bob Shoulders later told the Arkansas Democrat-Gazette that two of the loans were actually in default — one since the previous August and the other since December.

Shoulders told the Democrat-Gazette that ANB was working on consolidating the three loans when the feds swooped in. But the bankers I’ve talked to say it would be very unusual for a loan consolidation to take six months unless there were other problems — like, for instance, a fundamental inability to make the payments on a consolidated loan. And, as it happens, Shoulders has acknowledged that he and his wife — a daughter of Little Rock businessman Pat Riley Sr. — mismanaged their business affairs.  

After ANB failed, the Shoulderses tried to buy their own loans from the FDIC for about 66 cents on the dollar. But the FDIC doesn’t let deadbeat borrowers bid on their own loans, and that seems like a perfectly logical regulation to me. If a bank fails because too many borrowers stop paying, should borrowers who contributed to the failure then be rewarded with a bargain?

Instead, the FDIC took bids, and the winner of the package of nonperforming loans that included the debt on Fayetteville Athletic Club was SM-WLJ Asset Owner LLC of Coral Gables, Fla. SM-WLJ paid less than 35 cents on the dollar, which must be what the market will bear for nonperforming loans. After all, the Shoulderses may know that they can afford 66 percent of what they borrowed, even though they hadn’t been making payments, but third-party bidders just have to take their chances.

At that point, the Shoulderses owed principle and interest of more than $11 million to SM-WLJ, led by former Chicago banker Rick Williamson. They tried again to settle — this time for about $5 million. In their minds, SM-WLJ should have been happy with a return of about $1.5 million after only about 90 days. Instead, SM-WLJ filed for foreclosure, which is a time-honored method for getting to the true market value of an asset.

That’s when the name-calling began. Bob Shoulders called Williamson a “trash-eating rat,” according to a report in The New York Times. I doubt Shoulders meant to so accurately describe the mess he and his wife created. The loans to the Fayetteville Athletic Club are junk, and Williamson and SM-WLJ are like scrap dealers who try to separate out the valuable remnants. They are part of the natural cycle, but they aren’t predators or parasites. They are more like buzzards.

“If you want to fix what is ailing this country, you need to destroy the worthless debt out there,” Williamson told the Times. “You have to shut down the zombies, liquidate their assets.”

Yes, it’s sad and unfortunate that the Shoulderses may lose their business after 13 years, and it’s true that they might not have been in this particular fix if their bank, ANB Financial, hadn’t been shut down by the FDIC exactly when it was. But it is equally sad and true that the Shoulderses made bad and risky financial decisions long before the FDIC moved into Bentonville.

One might even suspect that only a bank run as poorly as ANB would have allowed the Shoulderses to get themselves so deeply in debt in the first place and then waited so long to foreclose. Irresponsible borrowers and irresponsible lenders do have a way of finding each other.