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A Bankers Tale

This essay originally appeared at The DailyReckoning.

We used to say it was time to "pull out the gun." It was our metaphor for the dirty business of kicking someone out of the bank, or, more specifically, getting the bank's money back. The metaphor was apt, because when we pulled the trigger it was usually all over for the company involved.

I was a corporate lender for years and we made loans to local and regional businesses. We wined and dined them, got to know the people behind the business personally and tried to get them to do business with the bank. So, it was always hard and difficult work when you had to turn around and get the money back when things started to go sour.

Company executives always seemed surprised when we delivered the news. I've come to believe that corporate executives can be the last people to know when there is something fundamentally wrong with their business - especially the ones who have been there awhile and built up the company. They were usually smart, confident and self-made people. Any setback was something they felt they could overcome. I know that is a counter-intuitive conclusion, but I've seen it happen enough to wonder.

As their bankers, we had to guard against this. It was easy to fall in love with the people and the company, and believe they were going to make it work. In fact, in some banks, when things turned sour, the bank would switch the account to another officer - thinking a fresh set of eyes would bring an unbiased view. Not our bank. We believed you clean up your own messes.

Anyone who has been a lender for a significant amount of time can attest to the fact that bad loans are an inevitable part of the business. I've made a few myself, but in each case the bank got out of the deal whole. In all my years of lending, I never lost so much as a penny.

My boss used to say I had a golden horseshoe stuck up my derriere. "Let me know if that thing ever falls out," he joked, "because then I'll fire you."

That track record was a mixture of luck and prudent underwriting and making sure we were covered with tangible assets so that we could work out of a deal if things didn't pan out the way we thought.

Company executives also usually took it personal. We went up to see one company in which we had lent several million dollars. We would debate a little amongst ourselves about who would "pull the trigger" - that is, who would actually say the words that we no longer wanted to be a part of this deal. This was no small task and was not typically done solo, unless it was over the phone. The message had to be delivered clearly and firmly - no cracks in the voice, no wandering eyes, no apologies. It was hard to do, because we often liked the people we did business with and got to know them pretty well.

Finally, we sat around a table and I told them why we wanted out. Stunned, the CEO let loose a stream of expletives and walked out. The CFO, who I knew better and got along with really well, was equally stunned. I'll never forget the sort of glassy-eyed look he gave me as he gathered up his things and left us alone in the conference room. We, too, gathered up our stuff and solemnly headed out - fittingly it was dark and cold when we left.

In the months following that, I negotiated with the deep-pocketed investors who backed the company. Frightened that the bank might do something rash such as liquidate their investment and hand them a dreadful loss, they eventually worked out a deal whereby they paid us out over a period of a few months. The CFO and CEO were soon replaced and the company was later sold. It was a wounded bird after we pulled the plug on them and couldn't survive on its own any longer.

But it wasn't always the bankers doing the tossing. I've been tossed out of a few offices myself.

Anyway, in all of our dealings, the people behind the businesses were always a critical factor. Character above all else, we often said. J.P. Morgan famously declared that he wouldn't lend a man any money for all the bonds in Christendom if he felt he couldn't trust him. So, we often spent a lot of time trying to read people.

We actually had consultants come in and teach us how to evaluate handshakes and all sorts of body language. Among these techniques were ways to tell when someone was lying. One particularly amusing trick is that apparently adults have this thing where we instinctively touch our nose when we are not telling the whole truth. I remember the consultants saying that during the Clinton hearings, the former president touched his nose some ungodly number of times.

The funny thing is, even though we were conscious of it, we couldn't help from doing it ourselves. I remember asking one banking executive - and this man had been to the same seminars - whether or not a particular deal would get done or not. He said, sure, he thought it would get done. Then he made this quick little scratch at his nose -imperceptible if you weren't looking for it - that betrayed what he really thought.

Needless to say this was a very useful, though not foolproof, when dealing with corporate executives and we often used the techniques on each other and in social settings.

Hand movements were all part of it, too. Closed fists were bad, a sign of holding something back or of a mind made up. Open palms were good, indicating honesty and openness. Folded arms, bad. Arms behind the back, good. Eye contact was crucial. Ask a question and watch the eyes.

We also put people in personality boxes. We had four general ones, and depending on what box we put you in that would determine what kind of proposal you got. Certain personality types like detail and proofs. They got the thick packages with lots of supporting material and data to chew on. Others made quick decisions and didn't sweat the details. They got the thinner packages, with lots of bullet points and executive summaries.

But some of the most important things I learned while being a banker had to do with learning how to evaluate a business, how to take apart financial statements and ask good questions. It gave me a lot of exposure to a variety of different businesses. One day I might be working on a rental equipment company, the next day a government contractor and the third day a lumberyard, followed by a high-tech consulting firm. It was a seemingly endless list of businesses doing all sorts of things. Each one had its own details that had to be mastered, as well as its own pitfalls.

I believe my experience as a banker has made me a much better investor. Those years of learning about businesses and financing in the trenches serve me well in ferreting out great investment opportunities for my readers.

Regards,

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