crumbling and about to topple.
Lewis D'Orsey, Alex recalled, had spoken of rumors about 'big losses which haven't been reported… sharp accounting practices among subsidiaries
… Big George Quartermain shopping for a Lockheed-type subsidy.' Vernon Jax had confirmed them all and discovered much, much more.
It was too late to do anything today, Alex decided. He had overnight to consider how the information should be used.
10
Jerome Patterton's normally ruddy face suffused an even deeper red. He protested, 'Dammit! what you're asking is ridiculous.'
'I'm not asking.' Alex Vandervoort's voice was tight with anger which had simmered since last night. 'I'm telling you do it'
'Asking, telling what's the difference? You want me to take - an arbitrary action without substantial reason.'
'I'll give you plenty of reasons later. Strong ones. Right now there isn't time.'
- They were in the FMA president's suite where Alex had been waiting when Patterton arrived this morning.
'The New York stock market has already been open fifty minutes,' Alex warned. 'We've lost that much time, we're losing more. Because you're the only one who can give an order to the trust department to sell every share of Supranational we're holding.'
'I won't!' Patterton's voice rose. 'Besides, what the devil is this? Who do you think you are, storming in here, giving orders…'
Alex glanced over his shoulder. The office door was open. He walked to close it, then returned.
'I'll tell you who I am, Jerome. I'm the guy who warned you, and warned the board; against in-depth
involvement with SuNatCo. I fought against heavy trust department buying of the shares, but no one including you would listen. Now Supranational is caving in.' Alex leaned across the desk and slammed a fist down hard. His face, eyes blazing, was close to Patterton's. 'Don't you understand? Supranational can bring this bank down with it.'
Patterton was shaken. He sat down heavily behind the desk. 'But is SuNatCo in real trouble? And are you sure?
'If I weren't, do you think I'd be here, behaving this way? Don't you understand I'm giving you a chance to salvage something out of what will be catastrophic anyway?' Alex pointed to his wrist watch. 'It's now an hour since the market opening. Jerome, get on a phone and give that order!'
Muscles around the bank president's face twitched nervously. Never strong or decisive, he reacted to situations rather than created them. Strong influence often swayed him, as Alex's was doing now.
'For God's sake, Alex, for your sake, I hope you know what you're doing.' Patterton reached for one of two telephones beside his desk, hesitated, then picked it up.
'Get me Mitchell in Trust… No, I'll wait… Mitch? This is Jerome. Listen carefully. I want you to give a sell order immediately on all the Supranational stock we hold
… Yes, sell. Every share.' Patterton listened, then said impatiently, 'Yes, I know what it'll do to the market, and I know the price is down already. I saw yesterday's quote. We'll take a loss. But still sell… Yes, I do know it's irregular.' Hs eyes sought Alex's as if for reassurance. The hand holding the telephone trembled as he said, 'There's no time to hold meetings. So do it! Don't waste.. .' Patterton grimaced, listening. 'Yes, I accept responsibility.'
When he had hung up the telephone, Patterton poured and drank a glass of water. He told Alex, 'You heard what I said. The stock is already down. Our seeing win depress it more. We'll be taking a big beating.'
'You're wrong,' Alex corrected him. 'Our trust clients people who trusted us win take the beating. And it would be bigger still if we'd waited. Even now we're not out of the woods. A week from now the SEC may disallow those sales.' 'Disallow? Why?'
'They may rule we had insider knowledge which we should have reported, and which would have halted trading in the stock.' 'What kind of knowledge?' 'What Supranational is about to be bankrupt.'
'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
