How Sea Island Became a Paradise Lost

The resort underwent a pricey makeover with easy money, and insider lending that bordered on crony capitalism

By Peter Waldman
BW Magazine

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January 11, 2010
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A.W. "Bill" Jones III had an eye for the finer things. After taking over his family's sprawling golf resort on Sea Island, Ga., in 1992, he toured America's top clubs for a sense of what the competition had to offer. Soon Sea Island Co.'s clubhouse locker rooms boasted antique wood beams, overstuffed couches, fireplaces, libraries, and mounted game from Jones' hunting trips to Africa.

Had his ambition ended there, Sea Island Co. might still be profitable. But Jones was just getting started. In 2001 he launched a plan to turn his sleepy island retreat into the Pebble Beach of the East, a playground for the global elite. He would rebuild Sea Island's Cloister Hotel and beach club in five-star splendor, replete with fine dining, a luxury spa, squash courts, koi ponds, and, overlooking all the action, high-end condos. The project's price tag quickly swelled to $500 million, but getting the money wouldn't be a problem. Jones sat on the board of a thriving regional bank, Columbus (Ga.)-based Synovus Financial Corp. (SNV), and his old hunting buddy and family friend, James H. Blanchard, wasn't just the CEO of Synovus—Blanchard also sat on Sea Island Co.'s board.

Even by the relaxed lending standards of the credit boom, the loans for Sea Island Co. were granted with so little fuss that Jones was able to chop several years off of his development plan. As construction began in 2003, he told Cigar Aficionado magazine: "The banks almost pay you to borrow money today."

Now Sea Island Co., the company that holds all of Jones' properties, is drowning in debt. With a $35 million payment due by the end of January, Jones is trying to rid himself of several properties and sell equity in the Cloister resort. Sea Island Co. has fired more than 400 workers, or 20% of its staff, in the past two years.

The decline of Sea Island is a spectacular example of the perils of insider lending, which the U.S. Federal Reserve defines as making loans to bank officers, directors, or major shareholders. While overall commercial lending soared during the credit bubble, insider lending more than kept pace: According to SNL Financial, insider loans as a percentage of all commercial lending rose from 3.1% in 2001 to 3.3% in 2006. At Synovus, Sea Island Co. was the bank's biggest customer.

Academic research has long correlated insider lending with bank failures. Edward Lawrence, a finance professor at the University of Missouri at St. Louis, co-authored a 1989 study that found that banks with high concentrations of insider loans were four times as likely to fail. "When directors are borrowers, nobody's standing back and saying 'It doesn't make sense to do this loan,' " says Lawrence.

With $1.1 billion in insider loans on its books as of Sept. 30, Synovus, the nation's 34th largest bank by assets, seemed to have a hearty appetite for such deals. It has also had a hunger for federal bailout funds: The bank borrowed $968 million from the U.S. Troubled Asset Relief Program in December 2008. Synovus' stock price plunged 75% in 2009 (through Dec. 29), to just over $2, and the bank axed 800 employees. Spokesman Gregory Hudgison says Synovus' financial condition is sound. Its high level of insider loans, he says, reflects Synovus' "unique" structure, with more than 500 directors of its community banks spread across five Southern states. Jones and Blanchard declined to comment.

At its worst, insider lending is a form of crony capitalism: Businessmen gain easy access to loans, while bankers boost their loan portfolios and, in some cases, take seats on the boards of the companies to which they're lending. The Federal Deposit Insurance Corp., the principal overseer of community banks, is paying closer attention. While it has spent much of the past two years doing triage, seizing and liquidating dozens of shaky institutions, "when the dust settles, one area that I'm sure we'll look at is [bank] governance, including managements and boards of directors," says Fred Gibson, the FDIC's Deputy Inspector General. Adds Sheila Bair, the FDIC's chairman: "I'm deeply skeptical of any kind of insider lending."