I think there is (obviously) massive looting going on, but I think a lot of it is unintentional. That is, my friend’s brother and his partners didn’t set out to loot. I’m sure they would rather have had things work out as their original plan dictated (rents grow, property values grow, loan gets paid off, etc.). The problem is that the system is full of bad incentives. And people respond to incentives. If you incent folks to lever, they will.
I’m hopeful that in all the coming reform and re-regulation of the financial system that the issue of incentives will be addressed, because that will solve a lot of the underlying problems.
Interestingly, these guys actually got quite lucky. Had they defaulted over a year ago there’s a good chance the bank would have had time to foreclose on the properties and collect what they could on the personal guarantees, thus BK-ing the partners. The same would have happened had they defaulted when they did and had the bank not gone into receivership. Likewise, had they waited until after the bank went into receivership, the vultures would have probably overpaid for the loan (it would still appear to be performing, thus a smaller discount to face value would have been applied) and would have had to squeeze them for more money to get a return. So, really, they got very lucky.
