I remember once having a very serious look at a particular (non-US) mortgage lending operation owned by Citigroup. I came from a banking culture where the first question you asked someone who wanted a loan was "why?"
Citigroup lent money in this operation purely against assets.
It was a great place to go if you wanted to borrow money no questions asked. It was "asset based lending".
Margin loans are always "asset based lending". You borrow against seemingly good security and they sell the security if the collateral isn't sufficient. Nobody asks you what you want the money for.
But perhaps they should. At least sometimes...
The broad outline of the Satyam fraud was that B. Ramalinga Raju produced fake accounts - with fake profits. The auditor however didn't pick up the fake accounts because the fake accounts accorded with actual cash flows.
The actual cash had to come from somewhere. It was injected by B. Ramalinga Raju and he obtained it by margining his shares.
He margined his shares for a billion dollars. A billion. Its a lot of money to just about anyone in the world.
And because they were margin loans nobody asked what he was doing with them.
But think about this rationally. Was he borrowing a billion dollars to spend? Well he didn't seem to live that lifestyle - and besides it probably really is impossible to spend that much.
So - presumably he was borrowing to invest...or so the bankers thought. The bankers should have asked for collateral - even secondary collateral - against what he was investing in.
But because it was a margin loan they didn't think to ask!
If only they had asked what B. Ramalinga Raju wanted a billion dollars for? No good answer probably means that there was no good reason to lend the money.
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