EXAMPLE 4 The case of the missing vans

Auto manufacturers lend their dealers money to help them keep vehicles on their lots. The loans are repaid when the vehicles are sold. A Long Island auto dealer named John McNamara borrowed more than $6 billion from General Motors between 1985 and 1991. In December 1990 alone, Mr. McNamara borrowed $425 million to buy 17,000 GM vans customized by an Indiana company, allegedly for sale overseas. GM happily lent McNamara the money because he always repaid the loans.

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Let’s pause to consider the numbers, as GM should have done but didn’t. At the time GM made this loan, the entire van-customizing industry produced only about 17,000 customized vans a month. So McNamara was claiming to buy an entire month’s production. These large, luxurious, and gas-guzzling vehicles are designed for U.S. interstate highways. The recreational vehicle trade association says that only 1.35% (not quite 2800 vans) were exported in 1990. It’s not plausible to claim that 17,000 vans in a single month are being bought for export. McNamara’s claimed purchases were large even when compared with total production of vans. Chevrolet, for example, produced 100,067 full-sized vans in all of 1990.

Having looked at the numbers, you can guess the rest. McNamara admitted in federal court in 1992 that he was defrauding GM on a massive scale. The Indiana company was a shell company set up by McNamara, its invoices were phony, and the vans didn’t exist. McNamara borrowed vastly from GM, used most of each loan to pay off the previous loan (thus establishing a record as a good credit risk), and skimmed off a bit for himself. The bit he skimmed amounted to more than $400 million. GM set aside $275 million to cover its losses. Two executives, who should have looked at the numbers relevant to their business, were fired.