Leasing Computers By George Snively
|I had a lot of fun arranging the leases of
computers to the customers of the GE Computer
Department. Our initial market was the banks and I had some memorable experiences
I early learned to stop by the bank's installment loan department to
pick up a copy of the loan agreement they used with their customers.
Invariably, when we came to the default provisions
in our lease they would raise objections to the clause as being
"unconscionable". I would then point to the same language in
their loan agreement.
In those days most bank executives had come up through the operations
ranks and were generally poor "money" men.
The Ohio National Bank (Now Bank One)
I had nearly completed the negotiation of the lease for
$3,000,000 of computers with Bob Matthews, the Executive Vice President of
The Ohio National Bank, when he said. "Everything is OK except the
apparent interest rate. We'll loan you the money at our prime rate of 4.5%
and you should then calculate the lease at 4.5%". "But
Bob," I said "we've calculated the lease at 6% which, if you
consider compensating balances and 1/2 point for the five year term is
actually slightly lower" . (i.e. 4.5%with a 20% compensating balance
= 5.63%. Add another .5% for the term and it equals 6.13%). "I don't
care" he insisted "we'll loan you the money at 4.5%".
After some more discussion, we came to a standoff. GE, at that time had
in excess of $300,000,000 in cash and was not in a borrowing mode.
Finally, in order to break the impasse, I stuck my neck out
and said "If you will give me a Letter of Credit for $3,000,000 at
4.5% for a five year term without compensating balances that the General
Electric Credit Corporation (GECC) can exercise, we'll write the lease at
4.5%". I figured that GECC would find someway to use the money and I'
d worry about how we worked things out between the Computer Department and
them later. "Fine" Bob said, and requested that the Bank's chief
lending officer be asked to come to the meeting. When he arrived, Bob
outlined the deal for him and the lending officer asked in clarification,
"What about compensating balances?". "None" replied
Bob. "What did you say the term is Bob?". "Five
years". "Can I see you out in the hall for a minute Bob?"
When Bob Matthews came back into the meeting
HE EXECUTED THE LEASE AS IT WAS WRITTEN.
Pittsburgh National Bank
The lease to Pittsburgh National Bank had been written with two
"stair steps" in order to level out the bank's costs during the
time they were converting to the new computer system. It was a 4 1/2 year
lease where the first year's rental was at 25% of level payments and the
second year at 50%.
The GE Computer Department had just made a prototype of the first
timesharing computer system. This first engineering system could only
handle seven terminals and I had been given one of them to see if a
financial man could make any use of it. I had been able to program it in
"Basic" to correctly calculate the payments on the lease at the
proposed rate of 6%. The bank had their comptroller, their
actuary, and a loan officer calculate it and got three different answers.
Each different than mine!
When I flew into Pittsburgh to get the lease executed, I learned that
the bank wanted to add more equipment to it. This was before the invention
of hand held computers and I usually carried a 4 inch thick book of
interest tables with me - but this time I had left
it in Phoenix. Surprisingly, the bank did not have a copy and tlhe only thing
that they could find was a small book of interest tables that they used
for mortgages. The tables I normally used carried the rate factors to 8
decimal points but the bank tables rounded up after 2 decimal points.
In checking my new calculations with these tables, it became obvious
that for some terms they rounded up nearly a 1/4 of a percent but they
were the only thing I had to work with.
After I had recalculated the numbers, Merle Gilliand the Comptroller
(later President and then Chairman) said. "Everything is OK but I
can't go to my Board and tell them that I'm paying 6%. Five and seven
eights - but not six". I replied, "Can I can use your tables?
They round up higher than the 6% we require".
"FINE, AS LONG AS I CAN POINT TO 5 7/8 % IN THE BOOK"
Merchandise National Bank
"What happens at the end of the 5 year lease term?" They
asked. "We will probably just abandon it here or sell it to you at a
nominal price; but in order to keep it as a 'true lease' the lease has to
be noncommittal as to what happens at the end of the term" I replied.
No one expected that this $450,000 computer system would have much
value at the end of five years or that the bank would want to keep it - or
that GE, having recovered its purchase price plus interest over the term-
would expect much for it.
But time flies. At the end of the five year term the GE Computer
Department had a new set of managers who, when the bank inquired about the
purchase option, suggested a price of$200,000! Uncommonly, the bank
officers with whom I had negotiated the lease were still in the same
positions (as was I) and declared:
"BUT SNIVELY SAID _ _ _"
Southern Hills National Bank
"You turned down a cashier's check from a bank?" he asked
incredulously. It was late Friday afternoon and I had returned from Tulsa,
Oklahoma to be summoned into Van Aken's office. He was the General Manager
of the GE Computer Department. "Was it any good?", he continued.
"Yes, as good as gold" I replied. Our Tulsa District Sales
Manager had phoned him to tell him that I had refused a cashier's check
for $350,000 from the Southern Hills National bank for the purchase of a
"I don't have time to discuss it now" said Van Aken "but
I want a written report on my desk the first thing Monday morning" .
The Southern Hills National Bank had opened its doors about six weeks
previously. It did so amidst a spate of national publicity as, to
immediately attract new accounts, it offered initial depositors a no
service charge account for life. The result was a block long line of
people opening accounts for themselves, their children and grandchildren
(and pets!!) - often with as little as $1.00. The promotion was planned to
run for two weeks, but was so successful that they extended it for two
more weeks. At the end of that time, the bank's
management was so carried away by the fact that their number of accounts
was approaching that of the major Tulsa bank's, that they kept extending
the promotion. I was called in when they wanted to discuss methods of
financing a computer.
When I met with the bank's management in Tulsa there was not a banker
in sight (except for a figurehead of a President from a small rural Kansas
bank). The board of the bank consisted of the lawyer who had prepared the
paperwork to obtain the Charter, the architect who had designed the
building they were planning to build (they were operating out of a
portable office trailer), the contractor who was going to build the
building and the local automobile dealer who would be the principal
borrower. They apparently met as a group, without the President, for every
Fortunately, some sixth sense had told me to take one of our headquarters'
banking specialists with me. While I was meeting with the Directors he was
checking out the activities in the back office. What he discovered was
ugly. The accounts had been opened with starter sets of checks which
did not have the name of the account holder, or the account number on
them. In order to post these checks to the proper account there were
sometimes three people trying to make out a signature and match it with a
signature card. They had rounded up every NCR posting machine they could
find in a four state area and had literally dragged people in off the
streets to help with the posting of checks. These people were only posting
three or four checks an hour each. Very few of the checks were being
posted during the 24 hour period when "not on us" or
"NSF" could be returned to the submitting bank. As a result,
they had to pay all of these "go backs"(1)
The cost of all of this was rapidly eating into their "Paid in
Capital" and was threatening their "Restricted Surplus" .
They needed to stop the bleeding and thought that they could do it with a
computer. They had the hopelessly naive belief that we could install a
computer over the weekend and have it up and operating on Monday morning!
They couldn't rent the computer as that would not slow the red ink.
However, they still had the capital funds that had been set
aside for their new building and could use those to purchase a computer.
I demurred, pointing out that their expectations were totally
unrealistic and that it would take weeks to make the computer system
effective. Additionally I pointed out "Your depositors all buy GE
washing machines, light bulbs and etc. and we have to think about them. If
anything should go awry, the national media will have a field day blaming
the bank's problems on a GE computer". I left a very dejected group
of people sitting in the meeting room and was driven out to the airport by
a salesman who was very agitated by my refusal to accept his "in
hand" order. The weekend TV and newspapers were full with the story
of the bank examiners moving into the bank on Saturday morning and closing
Monday morning Van called me into his office. His way of apologizing
was to say:
"SOMETIMES YOU'RE TOO DAMN SMART FOR YOUR OWN GOOD"
(1) If I had some larceny in my soul, I could
have--as they insisted that I do--opened an account. I could then have
written a large check and deposited that in my bank. They would never have
deciphered my signature and would have paid it.
South Houston Bank
(long ago merged with someone else)
Don Benscoter, of Lease Financing Corporation, and I had gone to
HOUSTON to get a computer lease signed. We had not expected to be ushered
into the Board Room which was occupied by the President of the Bank, the
Chairman, the Cashier, the DP manager, and the Bank's
Don had only three copies of the lease with him and apologized for not
having copies for everyone but pointed out that they were "live"
documents ready for execution. The bank's President asked whether their
attorney had a chance to review it. "No. But we'd appreciate
it if they did." Don replied. "It's a 'hell and high water'
document" he continued" and if your attorneys can find any holes
in it we would like to know it so that we can close them up" .
"How tight is it?" the Chairman asked. "It's like your
loan agreements" replied Don. "If any of your customers ever
read them they wouldn't sign it". "Well then" said the
President "there's no need to waste money on attorney's fees".
AND HE SIGNED IT!
Security Pacific National Bank
In contrast to some of the banks mentioned above, the Security Pacific
National Bank had unusually competent management. Paul Smith, the VP.
Finance, in particular was a very sharp numbers man. I am including them
in this discussion of banks only to take credit for one of my more
imaginative ideas in structuring leases to solve a particular problem.
I had gone to Los Angeles to help negotiate the lease of ten $1,200,000
computer systems with them. There were five five-year leases, one
five-year lease for each computer system which were to be delivered over a
period of several years. They were planning on replacing the computers at
the end of the five year terms and the question arose about how they could
handle the situation where the replacement computers were to go first to
sites that had the later deliveries. Conceivably,
the term of the computer at the first site could be satisfied while the
bank desired to replace the computer at the last site (with two years of
it's term remaining) first.
I suggested that instead of writing five 60 month leases that we write
one master lease for 300 systems months to be spread over the five systems
however the bank desired. Thus, if they wanted a replacement system
installed at a site which had twenty four months remaining of the original
term, they could return it to us and extend the terms of the remaining
systems by a total of twenty four months.
I was able to use this technique in several other situations where we
had multiple installations.
Western Pacific Railroad
Three railroads, The Denver & Rio Grande, the Atchison & Topeka
Fe, and the Western Pacific, mutually agreed to use the same "car
tracking" software which ran on GE computers. Both the Denver &
Rio Grande(1) and the Atchison & Topeka & Santa Fe had placed
orders for their computers but the Western Pacific kept delaying their
commitment. Then I got a can from our San Francisco office to tell me that
the Western Pacific had asked if they could purchase the computer on
installments with no payments during the first year. It sounded like a
request right up my alley and as soon as I could, I flew up to Oakland to
meet with them.
I met with Fred Tegler, the Vice President of Finance, and we
established an immediate rapport as fellow "bean counters" and
an even stronger bond when we learned that we had both been in Navy
Torpedo Bomber Squadrons. He as a pilot and me as an air-crewman. He
described to me the highly engineered track replacement program employed
by the railroads. For each section of track they can tell you the weight
of the rail, the degree of curvature, the degree of upgrade, the
anticipated ton-mileage over it and the month and year it is scheduled to
However, they are forced to follow ICC accounting rules which had been
promulgated in the 1800's and recently? (1919?) updated and the IRS
requires them to follow these same rules for tax purposes. Under these
rules railroad track is not depreciable. The quid-pro-quo is that
replacement track, up to the value of the original track is expensed.
All well and good except that in years of reduced revenues the second
thing, after advertising, that gets cut out of the operating budget is the
rail replacement that may have been planned for years. A heck of a way to
run a railroad.
This particular year the Western Pacific's revenues had taken a drastic
drop as the result of a strike in the mines which provided much of the
railroad's tonnage. It was also a year in which major rail replacements
had been planned. Fred said that he was having a tough time justifying
expenditures for computer rent at the expense of rail replacement - thus
his request for no payments during the first year.
I assured him that we would have no difficulty in structuring a lease
for him that had minimum rentals during the first year. He than mused
about the possibility of doing the same thing for his railroad track. I
told him that it might not be as preposterous an idea as it sounded and
that I would look into it. Upon returning to Phoenix, I discussed it with
Lease Financing Corporation and we learned that there is more track in
private hands (utility, industrial and mine spurs, etc.) than there is in
the hands of the mainline railroads. A check with the IRS confirmed that
in private hands track could be depreciated making possible a tax
sheltered lease. So, in order to close our computer sale
WE ENDED UP LEASING FIVE SECTIONS OF IT'S MAINLINE
TRACK TO THE WESTERN PACIFIC RAILROAD.
(1) I had previously gone to Denver to meet with the
Denver & Rio Grande Railroad. We met in their board room which was
like something from the 1800's. It had dark wood paneling, a green felt
cover on the table and spittoons beside each chair. It seemed to smell of