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Collapse of Metropolitan Mortgage & Securities blamed on CEO

By Drew DeSilver
Seattle Times business reporter

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Other links Bankruptcy Examiner's Report on Metropolitan Mortgage (including exhibits)

"Run as a virtual fiefdom by Sandifur, (Metropolitan) lacked personnel with the requisite training, experience or authority to deal effectively with the complicated and ever larger transactions in which it dealt," concluded Samuel Maizel, the examiner appointed by U.S. Bankruptcy Judge Patricia C. Williams to sort out the company's tangled finances.

"As successive business models failed, its leadership became increasingly dependent on financial schemes and artifices to present an image of a successful financial-services business," states the long-awaited report, filed yesterday in U.S. Bankruptcy Court in Spokane.

Maizel, a prominent bankruptcy attorney in Los Angeles, also concluded that the court does not have to appoint a trustee to run Metropolitan and its affiliated companies during the bankruptcy action.

Sandifur, his relatives and most of the former management team have either left the Metropolitan group or are no longer actively involved in running it, Maizel said in the report. The current managers "are independent, capable, and can be relied upon to liquidate assets, and to propose and implement a plan of reorganization that will be in the best interests of creditors."

Mary Keller, a spokeswoman for Spokane-based Metropolitan, did not immediately return a phone call seeking comment yesterday afternoon.

Metropolitan and its sister company, Summit Securities, filed for Chapter 11 bankruptcy protection in February. The two companies owe an estimated $583 million, mostly to thousands of small investors who bought the companies' notes and preferred stock.

Metropolitan executives set ever-larger and increasingly unrealistic lending goals, wrote Maizel.

Pressure to close deals

Employees who made loans were encouraged to close as many deals as possible, regardless of borrowers' credit quality, collateral value or even likelihood the loans would be repaid.

As a result, he said, "loans with little or no likelihood of ever fully performing were commonplace, and the Metropolitan Group's commercial-lending portfolio sustained a default rate of 40 percent."
 
He later called the company's commercial-lending program "a house of cards."

But this was not considered a problem, Maizel said, because of Metropolitan's "loan to own" policy, by which it built up a substantial real-estate portfolio through foreclosures on bad loans.

However, the examiner found, Metropolitan too often relied on outdated or overstated property appraisals and would sometimes "cherry pick" among multiple appraisals to find the "right" one.

Department of "sheep"

One witness described the appraisal department as "sheep."

Metropolitan's leaders, he said, "created an atmosphere of intense pressure on the staff to pull ever larger rabbits out of their hats to keep the family of businesses appearing profitable."

The result, Maizel said, was "decreased cash flow, liquidity problems, and more pressure on all parties to increase the churning of Metropolitan's loan portfolio.

Bankruptcy inevitably followed, and with it investors have suffered significant, and in some cases, devastating losses."

Metropolitan's problems were compounded by accounting systems and financial controls that Maizel characterized as "disorganized (and) byzantine," and which one witness described as "a big spider web of a mess."

The various companies comprising the Metropolitan group were run essentially as a single entity, Maizel found, and managers allocated loans and other assets among them based not on which company they actually belonged to but "on expediency, including needs to address a particular Metropolitan Group member's liquidity problems and to shore up members' financial statements in time for reporting-year-end."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com