2008-12-26 — ml-implode.com
By Teri Buhl, with contributions from IEHI Staff. Teri Buhl is an investigative journalist covering Wall Street who writes for the New York Post.
The FDICâ€™s most expensive bank failure, IndyMac, is slated to land in the hands of a private equity firm.
The winner is New Yorkâ€“based Dune Capital Management, founded by two ex-Goldman partners. Duneâ€™s Co-CEO Dan Niedich was known as the "dean" at Goldman of investing the firm's capital in real estate. Chairman and Co-CEO Steve Mnuchin comes from a family of Goldman bankers. The firm was seeded in 2004 by legendary hedge fund trader George Soros.
A sale price for the transaction could not be determined.
Dune Capital has recently been cleared for a bank charter. In principle this means the firm could qualify for TARP funds. The Treasury began issuing special expedited bank charters to private equity groups on November 21st, 2008.
Rumors swirled the market this month around who the natural bidder for the toxic bank would be, with Bloomberg reporting this week that PNC Financial Services Group and U.S. Bancorp were a likely fit, but the media didnâ€™t envision a â€œwinner take allâ€ outcome to take shape in the form of a private equity firm.
Executives inside of IndyMacâ€™s Pasadena office where told Tuesday a deal to sell the whole bank had been made, final contracts were being negotiated, and an announcement would come in the next couple of days. Assets for sale include: $6 billion in retail deposits, 33 California branches, a near-$200 billion loan servicing portfolio and platform, $16 billion in mortgage loans, and its reverse mortgage company Financial Freedom that holds a mortgage book worth $22 billion.
A slew of bids came in by the extended deadline of December 15th, but only for the failed bank's individual parts. Bidders fought over hot assets such as its loan servicing portion or the reverse mortgage company. According to an executive inside of IndyMac who was involved in the deal-making, serious players who did due diligence on the loan servicing portion included: Leon Blackâ€™s Apollo Group, Lone Star Capital, Dallas-based Beal Capital, and Goldman Sachs.
Goldman Sachs would not comment on whether they were interested in the whole bank or only the loan-servicing arm. But according to the IndyMac executive, the FDIC and its lead advisor Barclay's had concerns about Goldmanâ€™s balance sheet and itâ€™s ability to pay for the deal. Barclay's would not comment on its advisory position.
â€œTalk on our 6th floor executive offices was that Goldman would be sloppy seconds as a buyer,â€ said the IndyMac employee who spoke on the condition of anonymity.
As deal terms are still being negotiated through the Christmas holiday, specifics could not be determined and Dune Capital did not return a call for comment. The FDICâ€™s David Bar simply responded they would announce by year-end.
But the player involved in providing financing for Dune turns out to be a consortium of other private equity firms led by Oaktree Capital, a Los Angeles-based firm with over $55 billion in assets. According to the Indy insider TH Lee Partners, Michael Dellâ€™s MSD, Vestar Capital and Wafra Partners were also all part of Duneâ€™s due diligence team and are expected to shoulder some of the risk in financing the deal.
â€œIâ€™d seen a few of these firms before because when former CEO Mike Perry was rushing to shore up capital the private equity firms had agreed to invest if each got 25 percent of the company -- a move made to stay below the regulatory disclosure rules. But two of them backed out and it fell apart,â€ said the Indy insider who had been involved in the transaction.
According to sources inside of Indy, part of the concession on the deal by the FDIC involves their loan-modification program â€“ protecting it is an important political agenda for their leader Shelia Bair. The FDIC will eat the foregone interest and only sell the marked down principal amount of the loan to the buyer.
Getting the bank as a whole is a sticking point for Dune and as a result the Indy insider said theyâ€™ve been crunching numbers this week to try to get Dune to pay more for the reverse mortgage arm. The FDIC doesnâ€™t want egg on its face if the bid is too low, leaving room for the private equity firm to profit from the flip of an asset sale after the deal is done. As a result, even as of today the insider warned that â€œthe deal is still fluid.â€
A seasoned banker at GE Capital who asks not to be named said, â€œFor Dune this deal is about liquidity and with $6 billion of retail deposits thatâ€™s the prize theyâ€™re really after. The FDIC said they would use all means necessary to sell the bank and with this deal theyâ€™ll set the precedent for non-banking institutions to get into the banking game.â€
Paul Miller, bank analyst for Friedman Billings and Ramsey says, â€œPrivate Equity firms coming into the market will help but it doesn't fix the problem that most banks are broke.â€
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