There are so many myths and fables about leasing bank instruments that there is no place to begin. So let’s begin with the basic truthful tenants.
First, no one is going to back the issuance of a bank instrument (provide collateral), and allow you to borrow against it without knowing AND approving the use of the borrowed funds. The Applicant is going to be very careful and learn ALL the risks of your loan not being timely repaid before he will lease you the instrument. The reason for this is that the party backing the instrument (called “the Applicant”) is not stupid enough to take a small lease fee in exchange for losing the face value of the instrument upon your default of the loan (or guarantee) taken against it.
THE LESSON: So if a provider of a leased instrument offers you the lease of an instrument with a face value of $100 million for a lease fee of 10% ($10 million), and you wish to borrow against the instrument (or put it in jeopardy in some way), and if the provider does not take care of the securitization of that loan where he is satisfied that he will get his money back on your borrowings, then it is not a real deal and there is a fraud involved somewhere.
QUE: Where there are no or few authentic inquiries into the use of the funds and their security, followed up by no genuine request for securitization documents, references, and typical loan supporting information, there is a fraud going on. If you understand this tenant, then you can move forward and learn how these transactions really work.
Second, in analyzing to determine if an instrument lease transactions is a “real deal”, keep your eye always on the Applicant. There will only be an instrument lease transaction if the Applicant is satisfied that the risks are acceptable to him of losing money borrowed against the instrument (or put it in jeopardy in some way such as operating as a guarantee). This is the rule of instrument leasing. Learn it and remember it!
Here are some examples that will often work when leasing an instrument:
Commodities Trading: Use instrument as a guarantee to guarantee purchase and payment pending completion of sale and resale by the purchaser-lessee. On resale of the commodities the risk of the Applicant is eliminated by payment to the Seller from the proceeds of the resale by the purchaser-lessee.
Commodities Trading: Funds borrowed against leased instrument are used to pay Seller, and Applicant is paid and risk eliminated on resale of commodities to third party.
Real Estate Transactions: Leased instrument is used as a guarantee to “hold” a purchase pending obtaining financing. Once financing is obtained, Applicant has no further liability.
Purchase of a Business (securities): Leased instrument is used as a guarantee to “hold” a purchase of stock pending obtaining financing. Once financing is obtained, Applicant has no further liability. Financing is often easily obtained when Lessee has a buyer.
Purchase of a Business (Assets): Leased instrument is used as a guarantee to “hold” a purchase of assets pending obtaining financing. Once financing is obtained, Applicant has no further liability.
Construction Projects. In the financing of construction projects, leased instruments are used similarly as used in real estate purchase transactions. The leased instrument may be used a guarantee that sufficient funds are available to complete the project. This may provide “bridge financing” until a “take out” is in place. The Applicant will usually require a completion bond to be in place.
Third, in trying to keep your eye on the Applicant, sometimes it is very difficult to do so. The reasons generally are that the Applicant and the Provider are jointly committing a fraud and do not want the Applicant to be known or identified, or on the other hand (as in most cases) there is no Applicant. The Applicant is an imaginary creation of the Provider.
QUE: If there is no Applicant doing the right things in an honest manner, there is no leasing transaction deal. There is just a fraud.
Important Note on Spotting Fraud: Not only should you look for the behavior of the Applicant, look at the facts surrounding the payment of any money, big or small. You will usually be distracted by the possibility of losing a large sum that may be required. However, most frauds are not aimed at that large sum as the fraudsters know they will never collect that amount. They are seeking the payment of smaller fees and charges that do not seem important to you at the time. For instance, the advance payment of $5,000 in bank charges may seem unimportant, but that sum is the total object of the fraud. Some of the fraudsters will have ten transactions a month just stealing $5,000 per transaction while you are not looking as you are taking it out of your wallet and paying them.
Additional Note on Spotting Fraud: Where someone is willing to lease you a billion or more dollars, run! For these large deals it takes a consortium of banks to put together the guarantee involved, and usually the bank offered is unacceptable, including Chinese and Indonesian Banks where employee insiders cause a lot of problems. Do not get involved in the financing of multi-billion dollar government constructions projects (e.g. dams). These are invariably fraudulent.
Fourth, unfortunately, there is a situation in this type of financing where you are almost guaranteed to lose your money and the Applicant provides you with all that he agrees to provide you with; i.e. he provides you with a valid instrument drawn on an acceptable bank. Again, here is the scenario: (1) Ninety Percent (90%) of the time the outcome is that the Applicant provides you with the leased instrument as agreed, (2) you cannot use the instrument, and (3) the Applicant has earned the fee and keeps it. You have paid for an instrument you cannot use and have no civil or criminal liability against the Applicant, because he has done exactly as you requested.
Side Note for Prospective Applicants: This is why every Applicant that I have set up in business of providing leased bank instruments has made millions of dollars just waiting for you to screw up.
Back to you Lessees: What is your “screw up”? Almost 90% of you make the same mistake, and nearly the rest of you, to make up the 100%, make one or more of possible thirty or so mistakes.
THE LESSON: Few of these transactions work because (i) most are fraudulent and (ii) those that are legitimate are “screwed up” by lessees with incompetent counsel or no counsel at all that allow their clients to lose their money by making disastrous mistakes.
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