There are so many myths and fables about leasing bank instruments that there is no place to begin. So let’s begin with the basic truthful tenants.
First,
no one is going to back the issuance of a bank instrument (provide
collateral), and allow you to borrow against it without knowing AND
approving the use of the borrowed funds. The Applicant is going to be
very careful and learn ALL the risks of your loan not being timely
repaid before he will lease you the instrument. The reason for this is
that the party backing the instrument (called “the Applicant”) is not
stupid enough to take a small lease fee in exchange for losing the face
value of the instrument upon your default of the loan (or guarantee)
taken against it.
THE
LESSON: So if a provider of a leased instrument offers you the lease
of an instrument with a face value of $100 million for a lease fee of
10% ($10 million), and you wish to borrow against the instrument (or put
it in jeopardy in some way), and if the provider does not take care of
the securitization of that loan where he is satisfied that he will get
his money back on your borrowings, then it is not a real deal and there
is a fraud involved somewhere.
QUE:
Where there are no or few authentic inquiries into the use of the funds
and their security, followed up by no genuine request for
securitization documents, references, and typical loan supporting
information, there is a fraud going on. If you understand this tenant,
then you can move forward and learn how these transactions really work.
Second,
in analyzing to determine if an instrument lease transactions is a
“real deal”, keep your eye always on the Applicant. There will only be
an instrument lease transaction if the Applicant is satisfied that the
risks are acceptable to him of losing money borrowed against the
instrument (or put it in jeopardy in some way such as operating as a
guarantee). This is the rule of instrument leasing. Learn it and
remember it!
Here are some examples that will often work when leasing an instrument:
Commodities
Trading: Use instrument as a guarantee to guarantee purchase and
payment pending completion of sale and resale by the purchaser-lessee.
On resale of the commodities the risk of the Applicant is eliminated by
payment to the Seller from the proceeds of the resale by the
purchaser-lessee.
Commodities
Trading: Funds borrowed against leased instrument are used to pay
Seller, and Applicant is paid and risk eliminated on resale of
commodities to third party.
Real
Estate Transactions: Leased instrument is used as a guarantee to
“hold” a purchase pending obtaining financing. Once financing is
obtained, Applicant has no further liability.
Purchase
of a Business (securities): Leased instrument is used as a guarantee
to “hold” a purchase of stock pending obtaining financing. Once
financing is obtained, Applicant has no further liability. Financing is
often easily obtained when Lessee has a buyer.
Purchase
of a Business (Assets): Leased instrument is used as a guarantee to
“hold” a purchase of assets pending obtaining financing. Once financing
is obtained, Applicant has no further liability.
Construction
Projects. In the financing of construction projects, leased
instruments are used similarly as used in real estate purchase
transactions. The leased instrument may be used a guarantee that
sufficient funds are available to complete the project. This may provide
“bridge financing” until a “take out” is in place. The Applicant will
usually require a completion bond to be in place.
Third,
in trying to keep your eye on the Applicant, sometimes it is very
difficult to do so. The reasons generally are that the Applicant and
the Provider are jointly committing a fraud and do not want the
Applicant to be known or identified, or on the other hand (as in most
cases) there is no Applicant. The Applicant is an imaginary creation of
the Provider.
QUE:
If there is no Applicant doing the right things in an honest manner,
there is no leasing transaction deal. There is just a fraud.
Important
Note on Spotting Fraud: Not only should you look for the behavior of
the Applicant, look at the facts surrounding the payment of any money,
big or small. You will usually be distracted by the possibility of
losing a large sum that may be required. However, most frauds are not
aimed at that large sum as the fraudsters know they will never collect
that amount. They are seeking the payment of smaller fees and charges
that do not seem important to you at the time. For instance, the
advance payment of $5,000 in bank charges may seem unimportant, but that
sum is the total object of the fraud. Some of the fraudsters will have
ten transactions a month just stealing $5,000 per transaction while you
are not looking as you are taking it out of your wallet and paying
them.
Additional
Note on Spotting Fraud: Where someone is willing to lease you a
billion or more dollars, run! For these large deals it takes a
consortium of banks to put together the guarantee involved, and usually
the bank offered is unacceptable, including Chinese and Indonesian Banks
where employee insiders cause a lot of problems. Do not get involved
in the financing of multi-billion dollar government constructions
projects (e.g. dams). These are invariably fraudulent.
Fourth,
unfortunately, there is a situation in this type of financing where you
are almost guaranteed to lose your money and the Applicant provides you
with all that he agrees to provide you with; i.e. he provides you with a
valid instrument drawn on an acceptable bank. Again, here is the
scenario: (1) Ninety Percent (90%) of the time the outcome is that the
Applicant provides you with the leased instrument as agreed, (2) you
cannot use the instrument, and (3) the Applicant has earned the fee and
keeps it. You have paid for an instrument you cannot use and have no
civil or criminal liability against the Applicant, because he has done
exactly as you requested.
Side
Note for Prospective Applicants: This is why every Applicant that I
have set up in business of providing leased bank instruments has made
millions of dollars just waiting for you to screw up.
Back
to you Lessees: What is your “screw up”? Almost 90% of you make the
same mistake, and nearly the rest of you, to make up the 100%, make one
or more of possible thirty or so mistakes.
THE
LESSON: Few of these transactions work because (i) most are fraudulent
and (ii) those that are legitimate are “screwed up” by lessees with
incompetent counsel or no counsel at all that allow their clients to
lose their money by making disastrous mistakes.
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