Page 533 - WhyAsInY

CroWninG aCHieveMent: Harvey, tHe General Counsel
than the date in question, and I came away feeling that I would now be on the outs. Frankly, because of this episode and a few more things, I felt that I should leave.
Q: What other things?
A: For one thing, I was worried about what might be going on in
Coronet Capital. The borrowers there had secured their loans with real estate, in many cases with unsold cooperative apartments. The bad market was obviously affecting the value of that collateral. I wasn’t sure, but many of the borrowers did not seem to me as if they were likely to have the money for debt service when the time came. Interest was being paid currently, it was said, but, as I realized, the payments were not made out of the properties or the funds of the borrowers.
Q: Then how was the interest being paid?
A: Interest was being paid currently only because a portion of each
loan had been held in a reserve that was established when the initial borrowing occurred. In that way, the debt service was being paid out of funds borrowed from Coronet, not out of cash flow from the properties.
Q: So, what was likely to occur?
A: Those reserves were being used up and, at some point, the borrowers
would not be able to pay in accordance with the original terms of the loans. Many of the loans were constantly being “worked out,” meaning that their payment terms were being modified to enable the borrowers to stretch out their payment obligations—delaying the inevitable.
Q: What were the investors being told?
A: The financial statements that were given to investors in Coronet
Capital treated the loans as current, when, in fact, it was possible that disaster was around the corner. While arguably technically
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