Thursday, April 29, 2010

Gerald J. Ford's Preemptive Move: Pacific Capital's 'Pre-Failure' Recapitalization

Bank Billionaire Gerald Ford Targets Pacific Capital

April 29, 2010, 2:31 PM EDT

By Nikolaj Gammeltoft, Bloomberg

April 29 (Bloomberg) -- Gerald J. Ford, who became a billionaire by purchasing distressed lenders during the savings and loan crisis, will inject $500 million into Pacific Capital Bancorp as the California company struggles to survive.

Ford’s affiliates will pay 20 cents each for shares of Pacific Capital, whose stock closed at $4.11 yesterday in Nasdaq Stock Market trading and plunged as much as 57 percent today. Ford gets a 91 percent stake and the U.S. bailout fund must agree to take a paper loss, according to a statement. The offer was “the best alternative available to us to assure the company’s future,” Chairman Edward Birch said in the statement.

“Going from $4 to 20 cents a share is a big indication that there’s hole in the balance sheet,” said Lawrence Kaplan, an attorney at Paul Hastings Janofsky & Walker LLP in Washington and a former attorney at the Office of Thrift Supervision. “Whatever bank management can do, the best situation is to avoid a failure.”

The sale gives Ford, 65, a chance to increase the fortune amassed during the 1980s and 1990s by acquiring distressed banks and turning them around. The Texas billionaire led investors who transformed Golden State Bancorp Inc. into the second-largest U.S. savings and loan, which he sold to Citigroup Inc. in 2002 for $5.3 billion.

Much of his wealth was tied to California, where Golden State was based, and Ford said in the statement he’s pleased to be investing in a bank “with such deep roots in attractive markets” in that state. Ford will join Pacific Capital’s board with Carl B. Webb, the former president of Golden State.

Stock Falls

Pacific Capital fell $1.92 to $2.19 at 12:48 p.m. New York time and sold for as little as $1.75. The shares topped $39 in July 2005. Trading of bearish put options surged to a record last week before the announcement.

Pacific Capital turned to Ford after the Santa Barbara- based bank hired investment bankers last year to explore “strategic alternatives.” The company, with $5.42 billion of deposits at 50 branches, said in March its survival was in doubt and that shareholders might be wiped out.

The company hasn’t posted a profit since the first three months of 2008, and today reported a $79.9 million first-quarter loss, or $1.71 a share, tied to residential and commercial real estate and construction loans. Regulators have told First Pacific to develop a strategic plan that includes strengthening its earnings, capital and management.

Cutting a Deal

Recapitalizing a bank may be preferable to new investors because they avoid competitive bidding against other potential buyers, said Thomas Vartanian, a partner at Fried, Frank, Harris, Shriver & Jacobsen LLP in Washington.

“If you find an institution you think is a jewel and all it needs is some new capital, then you can cut your deal with the management and shareholders and you got it,” Vartanian said. “There are a lot of these transactions out there percolating and to see some of them getting done is a very positive step in terms of recapitalizing banks throughout the country.”

Terms call for Ford Financial Fund LP to buy 225 million shares at 20 cents each, and pay $1,000 each for 455,000 preferred shares that can convert to common. The U.S. Treasury Department would also have to agree to take a loss by swapping a stake valued at $180.6 million held by the Troubled Asset Relief Program for common shares at 20 cents each.


The Treasury would be left with a 7 percent stake and common shareholders with 2 percent. The shareholders get a chance to buy more shares at 20 cents in a rights offering.

Earlier this week, Sterling Financial Corp., the Spokane, Washington-based lender that posted more than $1 billion of losses in two years, said that private-equity firm Thomas H. Lee Partners LP agreed to inject $134.7 million. Lee also demanded that the Treasury swap its TARP stake.

Ford also demanded that investors in trust preferred securities and subordinated debt instruments swap some of their holdings for as little as 20 cents on the dollar.
Andrew Williams, a spokesman for the Treasury, declined to comment. Ford and Deborah L. Whiteley, spokeswoman for Pacific Capital, didn’t respond to calls and messages.
Ford, who isn’t related to the former U.S. president or founders of the U.S. auto-making empire, entered the banking business in 1975. He made his name in the last banking shakeout during the 1980s when he and billionaire Ronald Perelman acquired five debt-ridden thrifts, creating First Gibraltar Bank, and sold the franchise in 1992. With part of the proceeds, they purchased San Francisco-based First Nationwide Bank from Ford Motor Co. in 1994.

Golden State

Ford and Perelman transformed First Nationwide from a money-losing lender plagued by bad real estate loans into a profitable statewide thrift. They merged it with Golden State Bancorp in 1998, keeping the Golden State name to form the second-biggest U.S. savings and loan.

Citigroup bought Golden State in 2002 for $5.3 billion, giving Ford more than 20 million Citigroup shares, which soared past $1 billion in value while climbing 38 percent the next year. Ford was spared much of Citigroup’s wreckage because of a plan to divest his stake if the shares fell below a certain price. Ford has said he was mostly out at $45 a share; Citigroup now sells at about $4.55.

Pacific Capital was the third-biggest provider of tax- refund loans until December. That’s when the Office of the Comptroller of the Currency told the lender that its subsidiary, Santa Barbara Bank & Trust, wouldn’t receive regulatory approval to originate so-called refund anticipation loans, or RALs, in 2010. The company sold the tax business less than a month later.

Tax-refund loans are used to attract clients who need cash immediately by offering short-term loans based on the expected amount of their tax refunds. Consumer groups fault RALs for putting people deeper in debt, with interest rates on some of the loans that exceed 100 percent.

--With assistance from Peter Eichenbaum and Jeff Kearns in New York and Ari Levy in San Francisco. Editors: Rick Green, William Ahearn

To contact the reporter on this story: Nikolaj Gammeltoft in New York at

To contact the editor responsible for this story: Alec McCabe at