By Jonathan Keehner and Phil Mattingly April 14 (Bloomberg) — Starwood Capital Group LLC, Colony Capital LLC and TPG, whose leaders profited from the 1990s savings and loan crisis, are among firms buying assets from the Federal Deposit Insurance Corp. for as little as 22 cents cash on the dollar, according to data compiled by Bloomberg. The sales, some including no-interest financing from the agency, are part of an FDIC effort to clean out $40 billion of loans that regulators seized from failed banks. Starwood Chief Executive Officer Barry Sternlicht told potential investors in February it’s “very hard to lose money” on the deals. The government, which was faulted two decades ago for letting bank assets go at fire-sale prices, is planning to profit along with investors. Instead of selling the loans outright, the FDIC kept stakes of 50 percent or more in at least five loan portfolios sold since September. It’s also demanding as much as 70 percent of any gains. “They are doing a much better job this time around,” said John Bovenzi , the FDIC’s chief operating officer until last year, who also helped unwind the S&L crisis. “They have learned a lot, and they aren’t making the same mistakes.” Loan sales planned or completed so far this year total more than $8 billion by book value, compared with $10 billion in all of 2009. The FDIC arranged at least $860 million in interest- free financing this year to support deals, according to statements from the buyers. Failed Banks The sales involve packages of loans acquired by the FDIC from 182 banks that failed since the start of 2009. The loans typically are tied to commercial real estate and residential development, and can include debt on which borrowers stopped making payments or property seized by the bank. Terms entitle taxpayers to a share of any money that private investors squeeze from delinquent borrowers or any profit earned reselling the assets. The FDIC-backed debt has to be repaid before the private-equity firms can take any cash generated by the loans. Financing doesn’t go directly to investors. Instead, the FDIC is creating limited liability companies that hold the loans being sold and receive the financing. “It’s very hard to lose money on a transaction like that,” Sternlicht said on a Feb. 11 conference call with potential investors, according to a copy obtained by Bloomberg News. “That’s the kind of asymmetric risk profile you love in a deal.” ‘So Distressed’ Financing is made on a deal-by-deal basis and won’t necessarily continue, said agency spokesman Andrew Gray . “The financing helps pricing,” FDIC Chairman Sheila Bair said in a March 19 interview. The packages include hundreds of loans where borrowers aren’t making payments. Some “may be so distressed that a healthy bank just does not want to deal with them,” Bair said. Linus Wilson , a finance professor at the University of Louisiana at Lafayette who has written more than a dozen papers on government bailout programs , said the FDIC’s zero-percent financing artificially inflates prices by as much as 20 percent and leaves the agency’s insurance fund vulnerable to losses. The regulator may have to write down the value of its holdings if private-equity managers can’t recover as much from the loans as they expect, Wilson said. The agency could also lose money if its partners don’t make enough to repay the FDIC’s financing, he said. “A better structure would not subsidize high levels of leverage, and it would eliminate the government’s stake entirely,” he said. That would also allow the agency to collect cash more quickly while reducing risk, according to Wilson. Resolution Trust Things have changed since Sternlicht, 49, oversaw a fund that bought assets from the Resolution Trust Corp., the government agency that sold loans and property of failed lenders in the 1990s. The RTC disposed of $394 billion of assets from 747 banks between 1989 and 1995, according to an FDIC review published in 2000. Back then, a fund Sternlicht managed earned about a 94 percent return on purchases including those from the RTC, he said in the February call. This time when Starwood and its partners won a stake in a company holding $4.5 billion of unpaid loans, the FDIC added an “equity kicker.” It increases the agency’s stake to 70 percent from 60 percent once the Starwood-led group makes back twice its initial investment and earns a 25 percent internal rate of return, according to the regulator. The loans Starwood will help oversee were once held by the failed Chicago lender Corus Bankshares Inc. ‘Real Partnership’ “Structured loan sales benefit both investors and the U.S. taxpayer,” Sternlicht said in a telephone interview. “There is real partnership between the FDIC and investors in these deals, so you better be good at managing the assets.” Homebuilder Lennar Corp. also bought into two limited liability companies holding loans seized from failed banks. The Miami-based builder paid $243 million for a 40 percent stake in two LLCs with $3.05 billion of unpaid loans, according to data compiled by Bloomberg. Lennar’s cash contribution comes to about 19 cents per dollar of book value for its interest in one of the limited liability companies and about 23 cents for the other. In a February regulatory filing, Lennar valued the deals at about 40 cents on the dollar after taking into account $627 million in interest-free financing that went to the holding companies and the equity stake the FDIC is keeping. Book value refers to the unpaid balance of the loans. Lennar spokesman Marshall Ames declined to comment for this story. The Starwood-led group including TPG and developer Richard LeFrak bought a 40 percent stake in the company holding Corus’s portfolio for 31 cents cash on the dollar as measured against its share of the book value of the assets. The FDIC covered half of the deal’s $2.77 billion purchase price with an interest-free loan. Flats at Loft 5 Prospects for properties backing the FDIC assets are mixed, according to LeFrak , who visited a Corus property called the Flats at Loft 5 while in Las Vegas for his son’s wedding in October. About half of its 272 units are for rent, according to the leasing office . That’s because the condos didn’t sell, said LeFrak, whose holdings include 15,000 New York City apartments. “It was kind of like in the middle of nowhere, and the design was kind of unusual and you went: ‘Why would anyone do this?’” he asked. By contrast, LeFrak halted what he called “dirt cheap” sales at the Carlos Ott-designed Artech condominiums in Aventura, Florida, so that his group could raise prices. The Artech’s floor-to-ceiling windows overlook the Intercoastal Waterway, and buyers have access to boat slips, a beach club and a chartered yacht, according to marketing materials. The FDIC pledged up to $1 billion in working capital and to complete construction on unfinished developments, Starwood said in an October statement. ‘Enormous’ Risk “These are complex portfolios that face construction, litigation and performance issues,” said Colony Capital CEO Thomas Barrack , whose Santa Monica-based firm offered about 20 percent less than Starwood in the Corus bidding, people familiar with the sale said at the time. “They come with an enormous amount of risk, and bidders are betting to a degree on when the market corrects itself.” Colony returned to the FDIC auctions in January and won, paying 22 cents cash on the dollar for a 40 percent stake in a company holding $1.02 billion in unpaid commercial real estate loans. The FDIC retained a 60 percent interest and provided zero-coupon notes to finance the deal, Colony Financial Inc. said in a regulatory filing. Colony valued the purchase at 44 percent of the unpaid balance of the loans. Barrack, Bonderman Colony’s Barrack, Starwood’s Sternlicht and Fort Worth, Texas-based TPG co-founders David Bonderman and James Coulter all have experience buying bank assets dating back to the savings and loan crisis. Barrack, Bonderman and Coulter worked for Texas billionaire Robert Bass before starting their own private-equity firms. Bass oversaw the purchase of American Savings & Loan in a government- assisted rescue in 1988, at the time one of the biggest S&L failures . Representatives of Colony, TPG and Starwood Capital declined to comment about whether they are participating in pending auctions by the FDIC. FDIC sales scheduled this month included a $610.5 million package of real estate debts assembled from 19 seized lenders, including IndyMac Bank, Silverton Bank and New Frontier Bank. Regulators are also preparing to sell $3 billion of loans from AmTrust Bank, the Cleveland-based lender seized in December. Reluctant Banks Private buyers are taking a bigger role in FDIC disposals because banks are glutted with commercial property and reluctant to buy more, said Chip MacDonald , a partner with Jones Day in Atlanta who specializes in deals among banks. U.S. banks had $119 billion of non-performing commercial real estate loans on their books as of the fourth quarter, according to Foresight Analytics, a bank and property research firm in Oakland, California. Defaults are expected to pile up through 2011, and lenders have written off only 30 percent of the bad commercial mortgages they’ll ultimately face, according to a March report from Moody’s Investors Service. “They just don’t need more exposure to real estate,” MacDonald said. To contact the reporters on this story: Jonathan Keehner in New York at jkeehner@bloomberg.net ; Phil Mattingly in Washington at pmattingly@bloomberg.net .
