Fraternity Banks & Why Bail Outs Make for Bad Management
There’s something terribly, terribly wrong with hundreds of failing Greek Chapters around the country. Some ascribe the problems, mainly, to an “entitlement generation” unwilling to shoulder House responsibilities as was done in yesteryear. Others assert it is either too much (or too little) oversight by the alumni; or too much (or too little) cash contributions from them. And some will say it is due to senior University executives who simply want to do away with Greeks altogether.
As always, there is some merit to each of these arguments.
Rarely voiced is how much of the failings are due to irresponsible lending practices by banks — especially those in the hands of the national Headquarters? It’s a great question and deserves a lot more attention than it is getting.
Let’s start with the some of the most troubling question of all.
How is it that hundreds, if not thousands, of Chapters with Houses built fifty, sixty, seventy, eighty years ago have not retired their mortgages?
Given that properties located near universities are highly secure mortgage investments, and given that dysfunctional Chapters never seem able to pay off their mortgage, could it be that their bankers would prefer dysfunctional operations? Why in their right mind would they want to retire a note that keeps giving and giving and giving and giving?
The Alpha Sigma Chapter of Theta Chi is as good an example as any. (Although the “companion story” of the Delts next door is just as good!) click here
The Alpha Sigma Alumni are the owners of a magnificent House - a 17,700 square foot gem that sits on the crown of East 19th Avenue, two short blocks from the campus. Every realator I talked to estimates that “the dirt” (alone) is worth something close to $700,000. What banker in his (her?) right mind would not want to provide a secured loan up to, say, 80% of that amount? Add to this the fact that when bad times come along - as is now - the alumni will come forward to bail out their younger Brothers.
If this isn’t a good deal for the bank, what is?
Here is what makes it truly odd.
Every banker worth his salt is steeped in the conviction that loans should be granted on the basis of repayment through profitable operations. Yes, they want rock-solid security as well. But it’s not where they make their profits. They want their loans paid out of operating profits. Not charity. Not foreclosure. They know that good operators will find new opportunities and those will lead to good loans that are ultimately retired. For wise bankers, problem borrowers are bad business.
The good ones take seriously the operating functionality of the lender. They help them all they can — which is often the reason a “local bank” is the best choice for entity seeking the loan. Ask yourself this: Who can get effective help if your bank is 2,000 miles from the property?
Yet this is exactly the case with Alpha Sigma. Their bank is in Indianapolis and their property is in Oregon. Or Alabama. Or Maine. How in the world can a tiny bank with three or four employees possibly provide “help” to Chapters spread all over the nation?
The answer is obvious. They can’t.
But who cares? In good times both interest and principal come in month-after-month. In bad times, payments get spotty; even so, the interest (and penalties) accrue. The balance sheets and income statements by the bank look just as good, either way. Foreclosure is unlikely and even if it comes to that, all that is due will be paid.
Can you think of any “logical” reason that Alpha Sigma’s bank would not want a Chapter that can never quite pay off the mortgage? Can you think of any logical reason why those in charge of Alpha Sigma wouldn’t want to change banks to some smart guys here in Eugene?
{Please read the companion story which illustrates exactly how this plays out “in real life”.}