Monday, October 26, 2009

Capmark, a Big Commercial Lender, Files for Bankruptcy

October 26, 2009

By MICHAEL J. de la MERCED, New York Times

The Capmark Financial Group, the big commercial real estate finance company cobbled together from pieces of GMAC, filed for bankruptcy on Sunday after struggling with a heavy burden of failing loans and debt stemming from its leveraged buyout three years ago.

Capmark is only the latest to fall victim to continued trouble in the commercial real estate market, which many analysts have said will continue to deteriorate. Many small banks have collapsed this year under the weight of commercial loans.

The company had warned last month that it might seek Chapter 11 protection after reporting a $1.62 billion quarterly loss.

Last month, the company agreed to sell its mortgage loan and servicing business to Berkshire Hathaway and Leucadia National for as much as $490 million. That agreement carried a 60-day expiration date, or around Nov. 2 — unless Capmark filed for bankruptcy, which would give it 60 more days to complete the sale.

Kohlberg Kravis Roberts, Goldman Sachs Capital Partners, Five Mile Capital and Dune Capital bought GMAC’s commercial real estate businesses in 2006 for about $1.5 billion in cash, with GMAC retaining a 21 percent stake in the operation. K.K.R. has already written down the value of its Capmark investment to zero.

In a court filing on Sunday, Capmark said that it had about $20.1 billion in assets and $21 billion in liabilities as of June 30. About $10 billion of Capmark’s assets reside in a Utah bank the company owns, which will not be subject to a bankruptcy filing.

In a Chapter 11 proceeding, the Berkshire-Leucadia sale would be structured as a 363 sale, named after a section of the federal bankruptcy code. A Berkshire-Leucadia venture would be deemed the stalking horse bidder, which allows other companies to potentially top that offer.

Friday, October 9, 2009

Starwood Sees Payoff in Patience

OCTOBER 7, 2009

Corus's Condo Assets Look Primed to Rebound Someday; FDIC Approves Sale

By NICK TIMIRAOS, Wall Street Journal

Barry Sternlicht's Starwood Capital Group has a relatively straightforward game plan for the distressed condo assets of Corus Bank that he is set to buy in a closely watched federal auction: wait until the market recovers.

The deal, announced Tuesday evening by the Federal Deposit Insurance Corp., hands Starwood and its investor partners the Corus portfolio of 112 construction loans, more than two-thirds of which are in default or are in foreclosure. Starwood will have to decide how to deal with the troubled projects and their developers as well as those headed for default.

Mr. Sternlicht is under no pressure to move quickly. The FDIC structured the deal to discourage the winning bidder from "flipping" individual commercial real-estate loans and assets to vulture investors or individual borrowers. Instead, the deal gives added incentives for the winning bidder to manage assets and reduce debt.

The FDIC's offer of zero-percent financing means that "you can afford to hold these properties and sell them at the right pace in difficult markets," Mr. Sternlicht said in an interview.

Starwood and private-equity firm TPG made the winning bid of about $2.77 billion for the Corus assets, which was about 20% higher than competing offers, according to people familiar with the matter. Those assets have a face value of $5 billion, but many of the condo projects funded by Corus face varying degrees of distress.

The FDIC is providing financing and taking a 60% equity stake in the Starwood partnership. As a result, Starwood's upfront equity stake comes to $554 million. The FDIC is also offering up to $1 billion over the next five years for any unfunded commitments, construction overruns, and carrying costs for bank-owned inventory. The investors would have to pay off any of that debt, plus $1.38 billion in debt issued by the FDIC, before they can begin collecting on their investment.

The Starwood-led consortium includes private-equity firms W.L. Ross & Co. and Perry Capital LLC and beat out seven other bids, including those from investors Colony Capital LLC and New York developer Related Cos. Barclays Capital advised the FDIC on the auction.

"This is not about making a quick sale or a quick flip. This is about serving as an appropriate steward for the capital of the FDIC," said Harrison LeFrak, a principal of the LeFrak Organization, a developer with a small stake in the investor group.

Corus assets include luxury-condo projects in the hardest-hit housing markets in California, South Florida and Las Vegas. Some of those areas are seen as strong growth markets over the long term, and many will have little new construction coming online over the next few years.

"In years three, four and five, there won't be any more new condos being built in these markets and you'll be one of the few guys with new inventory," Mr. Sternlicht said.

In South Florida, where Corus had some 16 condo loans at the end of June, the Starwood-led consortium could leapfrog other developers that have been sidelined during the credit crunch. "There's a symbolic changing of the guards in terms of who is the most powerful entity in Miami's condo market," says Peter Zalewski of Condo Vultures LLC.

Starwood, founded by Mr. Sternlicht in 1991, is positioning itself to emerge as a major force in the world of distressed real estate. It has closed a $2 billion private-equity fund to buy distressed hotel assets and recently took a real-estate investment trust public, raising an additional $950 million that will be investing in distressed commercial real-estate loans and securities.

Chicago-based Corus was seized by federal regulators last month and another Chicago bank, MB Financial Inc., agreed to assume $6.6 billion in deposits from the bank. The FDIC has estimated that the Corus failure will cost its insurance fund about $1.7 billion.

The fate of Corus's borrowers remains to be determined in the coming months, as Starwood decides which loans it may extend, and where it will pursue foreclosure. Empty or unfinished developments, for example, might be converted to rental buildings until the market recovers.

Write to Nick Timiraos at nick.timiraos@wsj.com

Thursday, October 8, 2009

Retail Vacancies Hit Multiyear Highs

By KRIS HUDSON, Wall Street Journal

When consumers start their holiday shopping in earnest next month, they will find fewer stores competing for their business as vacancy rates at malls and shopping centers have risen to multiyear highs.

According to Reis Inc., a New York real-estate research firm, 10.3% of the retail space at U.S. shopping centers -- open-air centers typically anchored by a grocery store or big-box retailer -- was vacant in the third quarter. That was up from 8.4% in the same period a year earlier and was the highest vacancy rate since 1992. At enclosed malls, the vacancy rate rose two percentage points to 8.6%, the highest rate since Reis began tracking mall data in 2000.

The hardest-hit retail properties were those completed this year. Of those, 30% opened half-empty or worse, according to Reis data, which cover the 77 largest U.S. markets.

Mall and shopping-center owners are reeling from two years of flat to declining retail sales and waves of store closures. Many are still trying to find tenants to fill hundreds of vacancies created by the closures last year and early this year of chains including Linens 'n Things Inc., Circuit City Stores Inc. and Gottschalks Inc. Meanwhile, the closures continue to mount, with chains such as Blockbuster Inc., Hollywood Entertainment Corp.'s Game Crazy, Zale Corp. and AnnTaylor Stores Corp. cumulatively closing more than 1,000 stores.

The Federal Reserve has tallied nearly 8,300 store closings announced by retailers so far this year, including more than 1,500 large anchor stores. Last year, the International Council of Shopping Centers, an industry trade association, counted 6,900 such announced closures. The next-highest annual total recorded by the trade association was 7,000 in 2001.

As demand for retail space plummeted, average retail lease rates continued to decline in the third quarter, down 3.7% to $16.89 per square foot for shopping centers and off 3.5% to $39.18 for malls. And the outlook for a recovery in the near future appears bleak. "We don't see rent levels in retail returning to 2008 levels until 2016," said Victor Calanog, Reis director of research.

Glenn Rufrano, chief executive of Centro Properties Group, which owns 610 U.S. shopping centers, said Centro has managed to find new tenants to occupy stores vacated by bankrupt retailers, but only after making concessions.

Relief won't come soon. Market-research company Retail Metrics Inc. predicts that the 31 retailers it tracks will report Thursday an average decline of 0.8% in September sales at stores open at least a year. That would mark the 13th consecutive month of same-store sales declines. In addition, the National Retail Federation trade group disclosed its prediction Tuesday that this year's holiday-season sales will amount to a 1% decline from last year's total. That is on top of a 3.4% decline last year from 2007 levels.

"If sales are flat, plus or minus, that won't be so bad, especially since our tenants are carrying lower inventories," Centro's Mr. Rufrano said. "What we're hoping against are big negative sales over Christmas."

Some retailers are holding off on expansion plans until they can see how many closures occur after the holiday season and how willing landlords might be to cut deals to fill that space. Shopping centers tend to suffer more vacancies than malls because they house more local tenants. "The better malls are still strong," said Larry Meyer, executive vice president at affordable-fashion retailer Forever 21 Inc., which has opened dozens of stores this year.

Write to Kris Hudson at kris.hudson@wsj.com

Office Rents Dive as Vacancies Rise

By CHRISTINA S.N. LEWIS, Wall Street Journal

Rent for office space is falling at the fastest pace in more than a decade as vacancies create a glut and landlords slash prices to attract tenants.

Nationwide, effective office rents fell 8.5% in the third quarter compared with the same period a year ago, the steepest year-over-year decline since 1995, according to Reis Inc., a New York real-estate research firm.

The decline came as companies returned a net 19.6 million square feet of space to landlords in the third quarter, slightly more than in the second quarter. For the first three quarters of this year, the net decline in occupied space totaled a record 64.2 million square feet, the highest so-called negative absorption recorded since Reis began tracking the data in 1980. (That doesn't count space that left the market as a result of the 2001 terrorist attacks.)

The vacancy rate, meanwhile, hit 16.5%, a five-year high, according to Reis.

Declining rents and rising vacancies in the office sector signal more woes for the commercial-real-estate market, which already faces a lack of credit and plummeting property values. With landlords more likely to default, financial institutions, which hold trillions of dollars in commercial-real-estate debt also face more pain. "It means more losses for the banks, because they will have to write off more bad debt," said Victor Calanog, director of research for Reis.

For tenants, however, falling rents represent opportunities to save. Landlords are offering concessions, in the form of free rent and build-out costs. "There's a recognition [from some companies] that this is probably a bottom, let me lock in long term," said Mary Ann Tighe, a New York-based leasing broker with CB Richard Ellis, who has negotiated corporate relocations for tenants including advertising firm Ogilvy & Mather and retailer Limited Brands.

As bad as the current environment is for landlords, analysts say it will worsen as unemployment continues to rise. "Even though the technical recession may be over, the labor market typically takes anywhere from 18 to 24 months to bounce back in a consistent way," said Mr. Calanog, who predicts vacancy will rise through 2010 and may not peak until 2011. "If employers are still shedding jobs, they are also going to shed space."

Vacancies are highest in areas with poor housing markets and industrial cities. They are approaching historic highs in Southern California; Las Vegas; Phoenix; southwest Florida; Detroit; Dayton, Ohio; and Hartford, Conn. Other cities, including Dallas and other parts of Texas, and Atlanta, are seeing high vacancy rates largely as a result of overbuilding.

Rent declines were steepest in big cities with large financial sectors, which saw the greatest run-up in rents in 2006 and 2007. They include Seattle, which has been slammed by the failure of Washington Mutual Inc., New York and San Francisco. But the office market deteriorated broadly across virtually all regions: Of the 79 metro areas that Reis tracks, office vacancies rose in 72 of them and effective rents declined in 68 of them.

In Boston, intellectual-property law firm Fish & Richardson PC recently signed a lease for 124,000 square feet of space in a new development under construction on the South Boston waterfront, paying about $48 a foot with about $85 a foot in tenant improvements from the landlord, according to a person familiar with the deal -- compared with the roughly $55 a foot the firm is paying now to landlord Equity Office.

In its attempt to persuade the tenant to stay, Equity Office, which is owned by private-equity firm The Blackstone Group, initially offered the firm $84.50 a foot in December 2007, but dropped the price over time to stay competitive and sent wine and champagne gift baskets to all of the firm's 45 principals, according to Tim French, Fish & Richardson's Boston managing principal.

"We were like the belle of the ball," said Mr. French.

Write to Christina S.N. Lewis at christina.lewis@wsj.com

Wednesday, October 7, 2009

Debt-Market Paralysis Deepens Credit Drought

October 7, 2009

By JENNY ANDERSON, New York Times

A year after Washington rescued the big names of American finance, it’s still hard to get a loan. But the problem isn’t just tight-fisted banks.

The continued disarray in debt-securitization markets, which in recent years were the source of roughly 60 percent of all credit in the United States, is making loans scarce and threatening to slow the economic recovery. Many of these markets are operating only because the government is propping them up.

But now the Federal Reserve has put these markets on notice that it plans to withdraw its support for them. Policy makers hope private investors will return to the markets, which imploded during the financial crisis.

The exit will require a delicate balancing act, government officials said.

“You do it incrementally, where and when you think you can, and not sooner,” said Lee Sachs, a counselor to the Treasury secretary, Timothy F. Geithner.

The debt-securitization markets finance corporate loans, home mortgages, student loans and more. In good times, they enabled banks to package their loans into securities and resell them to investors. That process, known as securitization, freed banks to lend even more money.

Many investors have lost trust in securitization after losing huge sums on packages of subprime mortgages that had high default rates. The government has since spent more than $1 trillion trying to restore the markets, with mixed success.

Until more of the securitization market revives, or some new form of financing takes its place, a wide range of loans needed to secure a lasting economic recovery will remain elusive, experts said.

“Given the imperative for securitization markets to fuel bank lending, we won’t have meaningful economic growth until securitization markets are re-established,” said Joseph R. Mason, a professor of banking at Louisiana State University. Mr. Sachs agrees: “It’s very important these markets come back to get credit to businesses and families who need it, and also as a sign of confidence.”

Enormous swaths of this so-called shadow banking system remain paralyzed. Depending on the type of loan, certain securitization markets have fallen 40 to 100 percent.

A once-thriving private market in securities backed by home mortgages has collapsed, from $744 billion in 2005, at the peak of the housing boom, to $8 billion during the first half of this year.

The market for securities backed by commercial real estate loans is in worse shape. No new securities of this type have been issued in two years.

“The securitization markets are dead,” said Robert J. Shiller, the Yale University economist and housing expert who predicted the subprime collapse. The government is supporting them, he said, but it’s unclear what will happen when it extricates itself. “We’re stuck,” he said.

Despite the running problems, federal officials hope to start weaning the securitization markets off government support next spring. The Federal Reserve has spent about $905 billion buying government-guaranteed mortgages in an effort to keep mortgage rates low. It will continue buying until it reaches its target of $1.25 trillion.

Complicating the Fed’s plan, banks — the other source of credit next to the securitization markets — continue to rein in lending, according to data from the Federal Reserve. And next year, banks face accounting rule changes and capital requirements that could further restrict their ability to make loans.

To be sure, certain corners of the securitization market are percolating again, thanks to the government’s Term Asset-Backed Securities Loan Facility, or TALF, which provides attractive financing for investors who buy the securities.

Bonds backed by consumer debt — credit card debt, auto loans and some student loans — are being issued at costs close to those before the financial crisis, an indication that the market is functioning again.

But the program applies only to borrowers with stellar credit. It does not cover credit card debt or auto loans for people with blemished credit histories.

“The market is coming back, but a lot of it is because of TALF,” said Hyun Song Shin, a Princeton economist who studies securitization. “The big question is, Will the private issuance market stand on its own two feet without TALF, or has there been a fundamental change in the market that it is somehow hobbled permanently?”

That question is hard to answer as long as the government is dominating certain securitization markets. So far, the Fed has been most aggressive in supporting the market for mortgage-backed securities, which plays a crucial role in housing finance. The Fed is virtually the only buyer for these instruments, purchasing about $905 billion worth of government-guaranteed mortgage-backed securities through mid-September. Industry analysts estimate that is about 80 to 85 percent of the market.

“This is public support,” said George Miller, executive director for the American Securitization Forum, which represents the industry. “At the end of the day, the mortgage risk is held by the taxpayer.”

Investors are particularly concerned about the commercial real estate market. A big worry is that $50 billion of securitized commercial property loans are due to be refinanced in the next year. If that can’t be done, a toxic mix of declining property prices and maturing loans could lead to fresh losses at many banks.

“If there’s no mechanism, those properties will default,” said Arnold Phillips, who oversees mortgages and structured securities for the $50 billion in fixed-income investments managed by the California Public Employees’ Retirement System.

As long as the market remains closed, banks will be reluctant to make loans for commercial real estate, since they would have to hold on to them, rather than package them into securities.

Meanwhile, the programs the government has started have not changed securitization practices that many investors say were a cause of the financial crisis. Lawmakers remain concerned that when securitization comes back, it does so in a way that doesn’t put the financial system at risk.

“Our challenge is to have a robust securitization process that adds value to the economy and doesn’t undermine it,” said Senator Jack Reed, Democrat of Rhode Island and chairman of the Banking Subcommittee on Securities, Insurance and Investment. He plans to hold a hearing on securitization next month to find out why consumers and businesses are still having so much trouble getting loans.

Monday, October 5, 2009

Starwood, TPG Said to Win Auction for Corus Assets

By Jason Kelly and Jonathan Keehner, Bloomberg

Oct. 5 (Bloomberg) -- A group led by Starwood Capital Group LLC won the bidding for the assets of Corus Bankshares Inc., the Chicago lender seized by regulators after its portfolio of construction loans soured, according to people familiar with the decision.

Private-equity firm TPG was also part of the winning group in an auction run by the Federal Deposit Insurance Corp., said the people, who declined to be identified because the process is private. Corus, which was seized on Sept. 11, had a $5.4 billion commercial real estate loan portfolio as of March 31, including $997 million to condominiums in Miami and southeast Florida, according to company filings.

“For experienced funds with the expertise to manage these assets, it’s a great opportunity,” said Dennis Yeskey, a managing director at AlixPartners LLP who focuses on real estate. “If you needed a loan, for years it was always ‘Corus for condos.’”

FDIC spokesman Andrew Gray declined to comment. Starwood spokesman Tom Johnson and TPG spokesman Owen Blicksilver declined to comment.

The auction attracted bids from developers and private equity firms. At least two-thirds, or $410 billion, of commercial mortgages bundled and sold as bonds coming due between 2009 and 2018 will have difficulty refinancing, according to Deutsche Bank AG data.

WL Ross, Perry

“Commercial real estate exposure is the largest segment of most banks’ balance sheets, and is viewed as uniquely toxic given current market conditions,” said Steven Goldstein, a managing director at Alvarez & Marsal who advises private-equity firms. “These assets are most attractive to groups that focus on real estate, who believe they have the expertise to make lemonade out of lemons.”

The Starwood and TPG group also includes WL Ross & Co. and Perry Capital LLC, the people familiar with the group said.

Colony Capital LLC and The Related Cos, were among groups that submitted bids for the assets, the people said.

MB Financial Bank, which has more than 80 branches in the Chicago area, agreed last month to acquire $7 billion of Corus deposits.

To contact the reporters on this story: Jason Kelly in New York atjkelly14@bloomberg.net; Jonathan Keehner in New York atjkeehner@bloomberg.net.

Last Updated: October 5, 2009 14:40 EDT

FDIC's Bair drills down on how to end 'too big to fail'

October 4, 2009 | 3:34 pm

Federal Deposit Insurance Corp. Chairwoman Sheila Bair gave a long speech to an international meeting of bankers in Istanbul, Turkey, today, focusing on how to end the "too big to fail" doctrine.

"In a properly functioning market economy there will be winners and losers. When firms are no longer viable, they ought to fail," Bair said. "Actions that prevent firms from failing ultimately distort market mechanisms."

Nothing new there. But Bair then got into more detail about how she would level the playing field so that even the biggest financial institutions could be "wound down" if they failed, instead of being supported by the government.

For starters, she wants to make sure that any bank-holding company would pay the ultimate price if one of its banking units collapses, even if the company operates other businesses that are still viable:

"The basic rule should be that when an insured bank fails and a receiver is appointed, the holding company of that bank and its non-bank affiliates should also be subject to resolution.

"U.S. law already allows the FDIC to use the equity of other commonly owned banks if necessary to offset the losses to the insurance fund from a failure of a related bank. This so-called cross guarantee rule should be extended to apply to the holding company and affiliated firms."

Bair also got more specific about an idea she raised last summer, regarding forcing even the secured creditors of a bank to take haircuts in the event the bank fails:

"A more far reaching proposal to consider is limiting the claims of secured creditors to encourage them to monitor the riskiness of the financial firm.

"This could involve limiting their claims to no more than, say, 80% of their secured credits. This would ensure that market participants always have ‘skin in the game.’ "

But turning secured creditors into partially unsecured creditors, Bair acknowledged, "could have a major impact on the cost of funding for companies subject to the resolution mechanism."

In other words, it could raise the potential for another credit crisis if banks suddenly became unwilling to lend to peers because of the increased risk of loss.

Finally, Bair suggested serious consideration of a British idea for bank "living wills" -- plans, drawn up in advance, that would describe how an institution would be wound down if it failed:

"To make them more effective, perhaps the approved orderly wind down plans should be uploaded on the companies' websites for the information of stakeholders.

"Secured and unsecured creditors, counterparties, and shareholders will then have full information on the effect of a wind down on their positions.

"These public plans would also serve as a constant reminder to boards of directors and managements of the consequences of their risk taking, structural complexity, and operational fragility."

But would any of this really assure that Bank of America Corp. or JPMorgan Chase & Co. would be allowed to fail?

The best defense against "too big to fail" still might be former U.S. Secretary of State George Shultz’s idea: "If they are too big to fail, make them smaller."

-- Tom Petruno, Los Angeles Times

Saturday, October 3, 2009

Starwood Said to Be Near Deal to Buy Assets of Corus

October 3, 2009

By ZACHERY KOUWE, New York Times

The Starwood Capital Group, the real estate investment firm run by Barry Sternlicht, is close to a deal with the Federal Deposit Insurance Corporation to purchase the assets of Corus Bank, which failed under a mound of soured condominium and commercial mortgage loans, people briefed on the matter said Friday.

In addition to contributing capital for the purchase, Starwood plans to manage several foreclosed or soon-to-be-owned residential and office buildings seized by Corus after their borrowers defaulted. The deal could be announced as soon as Monday, these people said.

A private equity firm, W. L. Ross & Company, and at least two others are also contributing cash to the deal, these people added.

It is unclear how much the group is paying for the assets, which are said to have a face value of about $5 billion.

A Starwood spokesman declined to comment. As part of the deal, the F.D.I.C. plans to take an equity stake in the venture and provide financing.

Corus was seized by the F.D.I.C. last month and its $6.6 billion in deposits were assumed by MB Financial.

If the deal with Starwood goes through, the company will have beaten some major real estate investors like Thomas J. Barrack of Colony Capital; Jay Sugarman of iStar Financial; the New York developer Stephen M. Ross; and Lubert-Adler, a big property investor in Philadelphia.

In the run-up to the financial crisis, Corus barreled into hot markets like California, Florida and Nevada and kept lending as those markets boiled over.

Rather than diversify, it concentrated its lending bets by financing only a handful of big, risky projects. And it poured its idle cash into a small group of other banks and financial companies that were upended when the crisis struck.

Friday, October 2, 2009

Banks With 20% Unpaid Loans at 18-Year High Amid Recovery Doubt

By James Sterngold, Linda Shen and Dakin Campbell, Bloomberg

Oct. 2 (Bloomberg) -- The number of U.S. lenders that can’t collect on at least 20 percent of their loans hit an 18-year high, signaling that more bank failures and losses could slow an economic recovery.

Units of Frontier Financial Corp.,Towne Bancorp Inc. and Steel Partners Holdings LPare among 26 firms with more than one-fifth of their loans 90 days overdue or not accruing interest as of June 30 -- a level of distress almost five times the national average -- according to Federal Deposit Insurance Corp. data compiled for Bloomberg News by SNL Financial, a bank research firm. Three reported almost half of their loans weren’t being paid.

While regulators may not force firms on the list to close, requiring them to raise capital and curb loans may impede recovery in Florida, Illinois and seven other states. The banks are among the most vulnerable of a larger group of lenders whose failures the FDIC said could cost $100 billion by 2013.

“There are some zombie banks out there,” said Bert Ely, chief executive officer at Ely & Co., a bank consulting firm in Alexandria, Virginia. “Neither the banking industry nor the economy benefits from keeping weak banks in business.”

Ninety-five banks have failed this year at the fastest pace in almost two decades, depleting the FDIC’s insurance fund. The agency proposed on Sept. 29 that financial firms prepay three years of premiums, which would add $45 billion of reserves. The fund sank to $10.4 billion as of June 30, the lowest since 1993. It will run at a deficit starting this quarter, the agency said.

Non-Current Loans

The cost of this year’s failures to the FDIC equals 25 percent of the banks’ assets, according to agency data. Applying the same ratio to the $14.1 billion of assets held by the 26 lenders on SNL’s list means the FDIC could face additional losses of $3.5 billion.

Non-current loans averaged 4.35 percent of the total at U.S. banks as of June 30, the most in 26 years of FDIC data. Regulators typically take notice at 5 percent, according to Walter Mix, a former commissioner of the California Department of Financial Institutions. Corus Bankshares Inc.’s bank unit in Chicago was shut Sept. 11 after 71 percent of its loans soured.

The last time so many banks had 20 percent of their loans more than 90 days overdue was in 1991, near the end of the savings-and-loan crisis, when there were 60, according to an SNL analysis of FDIC data. That year the number of bank failures was less than half those at the peak of the crisis in 1988; this year closings are almost four times what they were in 2008.

For banks with 20 percent of loans overdue, “either they’ve got a massive amount of capital, or the FDIC just hasn’t gotten around to them,” said Jeff Davis, an analyst withFTN Equity Capital Markets in Nashville. Lack of staff and money are slowing shutdowns, he said.

Enforcement Orders

At least 17 of the 26 banks have been hit with civil penalties or enforcement orders that demand improved management and more capital, according to data compiled by Bloomberg. Failure to comply can lead to seizure.

The number of distressed banks is larger, with the FDIC counting 416 companies on its confidential list of “problem” lenders at mid-year.

The data were compiled by Charlottesville, Virginia-based SNL from FDIC records. Institutions that had loans less than 50 percent of assets were excluded, as were those closed since the end of June. The calculation didn’t include restructured loans modified after borrowers couldn’t keep up with the original terms, which have default rates of 40 percent to 60 percent within two months, according to SNL senior analystSebastian Hindman. Had such loans been included, the list would have swelled to 49 lenders holding $48.4 billion in assets.

Local Impact

Firms range in size from Frontier Bank in Everett, Washington, with $3.98 billion in assets, to Gordon Bank in Gordon, Georgia, with $35 million in assets. Six of the banks are in Florida and five in Illinois.

“While these aren’t your giant banks, they are the guys your local strip mall and commercial real estate investors get their funds from,” said Joseph Mason, a Louisiana State University banking professor and visiting scholar at the FDIC.

The bank with the highest level of non-current loans, 49 percent, is Community Bank of Lemont in Lemont, Illinois, a town of about 13,000 people 30 miles southwest of Chicago. Bad loans at the bank, about a third of them in construction and development, increased fivefold from a year earlier, according to FDIC data.

In February, the FDIC ordered Lemont, a unit of Oak Park, Illinois-based FBOP Corp., tostop “operating with management whose policies and practices are detrimental to the bank and jeopardize the safety of its deposits.” Calls to the bank seeking comment weren’t returned.

’A Surprise’

Another Illinois lender, Benchmark Bank, also had an increase in non-current loans, to 25 percent as of June 30 from about 1 percent a year earlier.

“Everything was so positive for so long in this area, it came as a surprise when it stopped,” said John Medernach, Benchmark’s CEO, who added that a building boom and bust in his region may have wrecked more than just his balance sheet.

“I stop and think of all the rich farmland that has been developed into subdivisions during the boom years,” Medernach said. “It makes you wonder what we’ve been doing.”

Frontier Bank, owned by Frontier Financial, reported a sixfold rise in overdue loans to $764.6 million in the quarter ended June 30 from a year earlier, or 22 percent, according to FDIC data. More than 43 percent of the bank’s delinquent loans were in construction and development, FDIC data show. The bank has 51 branches in northwestern Oregon and western Washington.

Steel Partners

In July, Frontier Financial agreed to be acquired by SP Acquisition Holdings Inc.,controlled by CEO Warren Lichtenstein, who heads the New York-based investment firm Steel Partners LLC, according to a presentation on the bank’s Web site. The deal would give Frontier access to about $456 million and create ’’an over-capitalized bank’’ that may consider acquisitions, the presentation said. The stock-swap transaction is scheduled to be completed in the fourth quarter.

Frontier “was a well-run organization for the majority of its history,” said Jeffrey Rulis, a banking analyst at D.A. Davidson & Co. in Lake Oswego, Oregon. The offer by SP Acquisition is “probably not what current shareholders envisioned a couple of years ago.” The company’s stock has dropped 92 percent in the last 12 months, and the bank posted an $84 million loss in the first half.

Patrick Fahey, Frontier’s CEO, said the transaction will resolve the bank’s credit issues. He declined to elaborate while a shareholder vote is pending.

Regulatory Art

Lichtenstein’s Steel Partners Holdings LP controls WebBank, a Salt Lake City lender with $35.5 million in assets and 31 percent of its loans overdue, according to SNL. More than 90 percent of construction and development loans weren’t current as of June 30, according to the FDIC. John McNamara, WebBank’s chairman and a managing director at Steel, declined to comment.

Determining which banks to close is “more of an art than a science,” said William Ruberry, spokesman at the Office of Thrift Supervision, which regulates four of the 26 lenders. “Examiners and the supervisory people have a lot of information that’s not public, and they know the circumstances of an institution and everything that goes into it.”

FDIC spokesman Greg Hernandez said in an e-mail that the agency doesn’t comment on individual institutions. Capital levels, profitability and financial strength of the owners are considered in addition to soured loans when deciding a bank’s fate, Hernandez said.

Sources of Capital

“There may be personal guarantees, there may be other collateral that will more than make up for the impairment on the 20 percent,” said Tom Giallanza, assistant superintendent for the State of Arizona Department of Financial Institutions, in a Sept. 15 interview. One bank on the list, Mesa, Arizona-based Towne Bank of Arizona, is in Giallanza’s state, with 28 percent of its loans non-current. Towne Bancorp CEO Patrick Patrick declined to comment.

H&R Block Bank, with 29 percent of its loans overdue, is dwarfed by the Kansas City, Missouri-based tax preparer that owns it. The bank’s deposits totaled $720.1 million as of June 30; assets at the parent company, H&R Block Inc., included more than $1 billion in cash and cash equivalents on July 31. The lender’s balance sheet is strong enough to be considered “well- capitalized” by regulators, according to FDIC reports.

The bank is a legacy of H&R Block’s subprime home lending that ended with more than $1 billion of losses for the parent company. The unit was kept open because it’s an inexpensive way to fund the company’s financial products, President Russell Smythsaid a year ago. Spokeswoman Elizabeth McKinley didn’t respond to requests for comment.

Pace of Closures

Regulators may be pacing themselves on closings because the FDIC fund “is only so big,” there isn’t enough staff to close all the struggling banks at once and customers aren’t staging mass withdrawals that would force action, said Kevin Fitzsimmons, a managing director at Sandler O’Neill & Partners LP, a New York brokerage firm specializing in banks.

While a high level of non-performing assets doesn’t mean a bank can’t survive, “in some cases it creates a hole that’s too deep to climb out of,” Fitzsimmons said.

To contact the reporters on this story: James Sterngold in New York atjsterngold2@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net;Dakin Campbell in San Francisco at dcampbell27@bloomberg.net.

Last Updated: October 2, 2009 00:01 EDT

Thursday, October 1, 2009

Two Treasury partners raise $500 million each for toxic assets effort

TCW Group Inc. of Los Angeles and Invesco Ltd. have completed their initial fundraising as part of the Public-Private Investment Program. Seven other fund managers are expected to follow suit

By Jim Puzzanghera, Los Angeles Times

October 1, 2009

Reporting from Washington

The Treasury Department's long-awaited attempt to deal with toxic mortgage securities cleared another hurdle as two of the nine fund managers selected to lead public-private partnerships to purchase the assets raised at least $500 million each.

Invesco Ltd. and Los Angeles-based TCW Group Inc. have completed their initial fundraising from private investors, bringing in a total of $1.13 billion in capital commitments as part of the Public-Private Investment Program, the Treasury said Wednesday. The money has been matched by the Treasury, which also will provide debt financing, giving the two funds a combined purchasing power of $4.52 billion.

Those funds now have 10 days to call in some of the capital and then can start purchasing assets.

"This program allows Treasury to partner with leading investment management firms to increase the flow of private capital into the market for legacy securities and give taxpayers a chance to share in the profits," said Treasury Secretary Timothy F. Geithner.

Securities backed by soured mortgages and other bad investments were at the heart of the financial crisis, and Congress created the $700-billion Toxic Asset Relief Program last fall to buy them from financial institutions.

But the Bush administration decided to use some of the money to purchase equity stakes in banks and concluded the original plan to purchase the assets was too complicated to be successful.

The Obama administration has tried to launch a scaled-back program, designed to use the remaining TARP money to lure private investors into buying the assets in partnership with the government. In July, the Treasury Department announced a significantly downsized program, with the goal of getting private fund managers to raise as much as $10 billion, which would be combined with as much as $30 billion in government money to buy the assets.

The Treasury Department named nine fund managers in July, which then began raising money from private investors. The department said it expected the seven other fund managers, including BlackRock Inc. and Wellington Management Co., to each raise the minimum $500 million by the end of the month. Once they reach that threshold, the fund managers have six months to raise additional money, up to $1.1 billion each.

jim.puzzanghera@

latimes.com