5. What was the significance of Lincoln receiving nonrecourse notes rather than recourse notes as payment or partial payment on many of the properties sold?
The first thing to look at is what the difference between nonrecourse and recourse notes is. A nonrecourse note is a note that prohibits the lender from attempting further restitution from the borrower in case of default. This means that the lender may not receive further compensation for a default loan. The lender can only take back the item that was loaned as compensation for a default. In a recourse loan, the lender may go after other forms of compensation for a default on the note. This may include assets the borrower has, such as wages, land, and property.
The Lincoln Savings and Loan Association, which was led by Charles Keating, were able to show great profits by using these nonrecourse notes. Their most profitable and most scrutinized deal came with the Hidden Valley Transaction that took place in the spring of 1987. Lincoln started the transaction by loaning 19.6 million to E.C. Garcia and Company. Later, Ernie Garcia, who was a close friend of Keaton and the owner of E.C. Garcia and Company, gave a loan to Wescon for 3.5 million. The next day Wescon purchased 1000 acres of land from Lincoln for 14 million dollars and used the 3.5 million dollar loan from E.C. Garcia and company as down payment for the land. The remaining balance would go as a nonrecourse note. This allowed Lincoln to record a profit of 11.1 million dollars on their books. Lincoln would use many of similar transactions to produce profits of over 135 million over two years. Lincoln would never expect to receive payment in cash; they just wanted to show a large gain on their books. By using a nonrecourse note, Lincoln could just reclaim the land once Wescon defaulted on it and it would go into bad debt expense on the books. That is the importance of the nonrecourse note it allowed Lincoln to show big profits for,...
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