I originally wrote this article for ProMinistry in English:
THE TRAGEDY OF MICHAEL SHEN
Recently much attention among the Chinese communities has been focused on the tragic suicide death of prominent automobile dealer Michael Shen. A self-made man, he started from the bottom to eventually become one of the largest Chinese car dealers in the country. At one time he owned 5 different car dealerships, and sales each year were in the millions of dollars. His name is still prominently displayed at his dealerships, and he was active socially. I do not know Michael Shen personally, so I am not qualified to comment on his personal success or failure. But I would like to comment about what he did from the viewpoint of a former banker.
It appears Michael Shen’s woes originated from rapid expansion of his business and cash flow problems. He saw the difficulties in competing with large dealerships, so he wanted to expand. But his capital base was not sufficient to fund such rapid expansion. The lack of sufficient capital is the number one cause of failure among small and medium size businesses.
An experienced entrepreneur, Michael Shen must have known that he did not have sufficient capital. However, rather than contracting his business or bringing in new partners with new capital, he decided to tough it out on his own. Somehow during 1997 he lost a “special financing deal" from the car manufacturers, and this exacerbated his cash flow problems. His efforts to obtain additional bank financing failed. This was the beginning of the end.
It is easy from hindsight to say at that time he should have shrunk his business and cut his overheads. After all, it is painful to downsize the business and lay off people. Apparently he cared a lot about his employees, so he saw no choice but to fight on. At this time, he made a terrible mistake by resorting to the use of “kiting" to cover up his cash flow problems. “Kiting" is the technique of using checks from account A to fund account B, and then use checks from account B to fund account A. Neither account had the actual funds in the account, so this “smoke and mirror" approach merely creates the illusion of account balances when there was none. Due to the timing gap in clearing checks, one could do this for a while and be able to “create" an illusion of account balance. But a couple of things must happen, or else this scheme would fail. First, this chain of checks being deposited into the accounts had to continue indefinitely like clockwork. Second, the banks involved must stay ignorant of what is going on, or else they would naturally put an end to it. As history shows, a kiting scheme always come to an end at some point. A lucky perpetrator would put in real money to cover the checks before the banks find out, so the kiting scheme might end quietly. But more often than not, the kite had to go on and it only ended when it was discovered, and the schemer had to bear the serious consequences.
What one of Michael Shen’s friends told the newspaper was particularly troubling to me, a former banker. This person said something to the effect that every business owner generates cash flow by using the “check clearing time gaps", and Michael Shen’s only fault was that he was caught and the amount of his kite was relatively large. “It was not that big of a deal", this person concluded. I strongly disagree with this view. First of all, not every business owner kites to generate cash flow. Second, depositing a check when you know that the checking account has insufficient funds is a crime. One must not overlook the fact that kiting is illegal, whatever the amount involved is. When a kite is stopped, usually at least one of the banks (usually the one that discovered the scheme last) would suffer financial losses. So kiting is definitely a scam, and such an act against a federally-insured institution is considered a federal crime.
Another friend of Michael Shen told the newspaper that Citibank should not have notified the authorities, but should have worked it out with him. This person blamed the bank for pushing Michael Shen to ruins. Again, I don’t think this is a fair comment. Banks are bound by banking regulations to report all criminal activities to the authorities at once. Apparently this was what triggered his criminal prosecution by the federal government, not by the bank. The bank did bring a civil suit against him and his family members to recover its losses. The bank had no choice but to act the way it did. Otherwise, the bank would face regulatory sanctions.
A couple of puzzling things that I am unable to explain. First, kiting usually involve more than one banks because in order to take advantage of check clearing time gaps, the checks need to be drawn on another bank (the farther the better). Checks drawn on different accounts at the same bank would create little or no clearing time gaps. Apparently only one bank was involved in this case. Second, despite computerized and sophisticated kite detection systems that every bank has, this kiting scheme went on for quite a while before it was caught by the bank. The S.F. Examiner reported that the civil suit mentioned internal collaboration, so perhaps human factors were involved.
It is difficult to imagine the feeling of hopelessness and desperation Michael Shen felt before he took his girlfriend’s life and his own life. A lifetime of efforts was in ruins. The only realistic prospect seemed to be a long prison term and personal bankruptcy. The paper reported that he was a Christian. If he was, then he should have remembered that the end of a man’s way is the beginning of God’s way. There is always hope, peace and joy in Him no matter how bad our personal situation is. God promised to give peace to those who are tired and heavy laden, only if they would seek refuge in Him (Matthew 11:28). And in business, as in anything else, we need wisdom to make the right decisions, and “the fear of the Lord is the beginning of wisdom". ( Proverbs 1:7)