its lending subsidiary, which mainly made loans unlikely to cause massive

losses.

 

Now there are two special classes of loans that naturally cause much trouble for

lenders. The first is ninety-five percent-of-value construction loans to any

kind of real estate developer, and the second is any kind of construction loan

on a hotel. So, naturally, if one was willing to loan approximately ninety-five

percent of the real cost to a developer constructing a hotel, the loan would

bear a much-higher-than-normal interest rate because the credit- loss danger

would be much higher than normal. So, sound accounting for Westinghouse in

making a big, new mass of ninety-five percent-of-value construction loans to

hotel developers would have been to report almost no profit, or even a loss, on

each loan until, years later, the loan became clearly worth par. But

Westinghouse instead plunged into big-time construction lending on hotels, using

accounting that made its lending officers look good because it showed extremely

high starting income from loans that were very inferior to the loans from which

the company had suffered small credit losses in the past. This terrible

accounting was allowed by both international and outside accountants for

Westinghouse as they displayed the conduct predicted by the refrain: “Whose

bread I eat, his song I sing.”

 

The result was billions of dollars of losses. Who was at fault? The guy from the

refrigerator division, or some similar division, who as lending officer was

suddenly in charge of loans to hotel developers? Or the accountants and other

senior people who tolerated a nearly insane incentive structure, almost sure to