When regulators took over the First National Bank of Nevada last year, they faced a showdown with the Terrible Herbst, the mustachioed cowboy who boasts of being the “best bad man in the West.”
This was no real gunslinger, but the name and logo of a chain of gas stations and convenience stores in Nevada that feature slot machines next to candy and beer.
The family-owned Herbst chain, auditors at the Federal Deposit Insurance Corporation concluded, did not generate enough sales at its Reno-area gas stations to support the repayment of a loan, leaving auditors with three bad choices: Move to take over those stations and put the government in the gambling business. Cut off any flow of additional loan money. Or sell the loan at a steep loss.
What to do, what to do, what to do with Terrible Herbst? Well, ya got to know when to hold 'em, know when to fold 'em, know when to walk away, know when to run. Consider the options:
In the case of Terrible Herbst and its Reno-area gas stations, officials at the F.D.I.C. considered taking the highly unusual step of applying for a temporary casino license, allowing the agency to operate the gas stations and the electronic games after perhaps foreclosing on the nearly $10 million loan, one official involved in the effort said.
Another option, simply cutting off additional advances of cash from the loan, was ruled out because the business might close, making it nearly impossible to collect any of the outstanding principal.
What to do, what to do, what to do. Okay. Here's the plan:
The resolution of the case turned out to be a windfall for Terrible Herbst. The government put the loan on sale, and who should buy it directly from the government but the Herbst family, at a discount of more than 50 percent.
The government ate the loss, but at least it collected on some of the bad debt, the F.D.I.C. official involved in the deal said.
Executives at Terrible Herbst, who said they never formally refused to pay off the loan in full, were hardly disappointed.
“It worked out just fine,” said Sean Higgins, the company’s general counsel. “At least for Terrible Herbst.”
I think I understand.
Herbst owes $10 million on the properties, but can't generate enough income to pay them off.
FDIC doesn't want to takeover and run the properties, doesn't want to loan any more money. So, FDIC will let the government take a loss. Sell the properties at a "MORE than 50% discount." Just how much more, we are not told. I wonder why?
Suppose it's a 60% discount. Somebody was smart enough to find a dumb buyer for these toxic assets. Cool. Rather than having a toxic asset on its books, the government now has a cool $4 mill.
Some sucker owns the properties. Who dat sucker? Why, dat sucker is none other than Terrible Herbst. They just saved (something on the order of) $6,000,000.
Can anyone say potential moral hazard here? Any reason NOT to give say a 5% "fee" to a player with enough ambition to put get this deal done. How about if the player is maybe the brother-in-law of the FDIC regulator?
It's the great American way.