[R-G] [BillTottenWeblog] Veterans of 1990s Bailout Hope for Profit in New One

[Bill Totten]

by Eric Lipton and David D Kirkpatrick

The New York Times (December 29 2008)


A tight-knit group of former senior government officials who were
central players in the savings and loan bailout of the 1990s are seeking
to capitalize on the latest economic meltdown, enjoying a surge in new
business in their work now as private lawyers, investors and lobbyists.

With $700 billion in bailout money up for grabs, and billions of dollars
worth of bad debt or failed bank assets most likely headed for sale or
auction, these former officials are helping their clients get a piece of
the bailout money or the chance to buy, at fire-sale prices, some of the
bank assets taken over by the federal government.

"It is a good time to be me", said John L Douglas, a partner in Atlanta
at the law firm Paul Hastings and a former lawyer for bank regulators
who helped create the agency that administered the last federal bailout,
the Resolution Trust Corporation.

Some of these former federal officials, like L William Seidman, the
first chairman of the RTC, are serving as advisers - sharing ideas with
Treasury Secretary Henry M Paulson Jr and the transition team for
President-elect Barack Obama - even while they are separately directing
investors or banks on how to best profit from this advice.

"It is an enormous market", said Mr Seidman, who has already joined two
such potential money-making efforts and is evaluating proposals to
participate in a third. "I am enjoying this".

David B Iannarone, a former RTC lawyer who is managing partner at a firm
that handles defaulted commercial real estate loans, said, "The people
who worked on this back in the early 1990s are back in vogue".

The agency was set up by the government in 1989 to sell off what
ultimately grew to $450 billion worth of real estate and other assets
assembled from 747 collapsed savings banks.

What is obvious to former RTC officials is that, like the last go
around, a great deal of money will be made by a select group of
investors and business operators, particularly those with government
contacts. The former government officials said in interviews that much
of what is motivating them is a desire to help the nation recover from
this latest stumble. But they acknowledge they intend to be among the
winners who emerge.

"Fortunes will be made here, no doubt about it", said Gary J
Silversmith, one of more than a dozen former RTC officials interviewed
who now are involved in enterprises seeking to profit from bank bailouts.

The busiest money-making arena so far for these RTC alumni is in helping
distressed banks line up cash infusions from the Treasury, as they seek
a piece of the bailout.

Robert L Clarke, controller of the currency under the first President
Bush and a former Resolution Trust board member, has been advising banks
throughout the South on how to get their share of the bailout money.

"I have been absolutely inundated", said Mr Clarke, who now works at
Bracewell & Giuliani, the law firm based in Houston affiliated with the
former New York mayor and presidential candidate Rudolph W Giuliani.

Mr Clarke's labor on behalf of his clients has included calling federal
regulators to urge them to reconsider plans to reject applications for
federal bailout money. He would not identify the banks, saying it might
undermine public confidence in them.

But Mr Clarke said his intervention, in at least some cases, has been
successful.

Eugene Ludwig, the comptroller of the currency under President Bill
Clinton during the final stages of the savings-and-loan cleanup, runs
Promontory Financial Group, a banking consultant group whose clients
include struggling banks.

"I must get an e-mail a day from people who I worked with back then
about what to do about the current mess", Mr Ludwig said. "It is not so
much capitalizing on it as really just, how do we contain the flames?"

Many of the former federal officials like Mr Ludwig have stayed in the
field, working as lawyers or contractors who buy up and resell seized
bank properties. What is remarkable now is just how busy they are.

"It is a great time to be a banking lawyer", said Thomas P Vartanian, a
partner in the Washington office of Fried Frank, who is the former
general counsel to the Federal Savings and Loan Insurance Corporation,
which led a bank bailout effort in the 1980s.

The planned sale by the FDIC of the assets of IndyMac, the failed bank,
has turned into an alumni event of sorts for veterans of the RTC era,
including John J Oros, who was chairman of a financial industry council
that advised bank regulators during the savings and loan crisis. Now he
is a partner in J C Flowers, one of the private equity firms negotiating
to buy part of IndyMac.

In the space of one weekend in September he explored buying out the
troubled insurer AIG and worked with Bank of America on an aborted
acquisition of Lehman Brothers. Then he advised Bank of America on its
last-minute switch to buy Merrill Lynch before Lehman's collapse
hammered Wall Street.

Although the financial meltdown is a disaster for the country, Mr Oros
said, "the opportunity going forward is unprecedented. It is fantastic.
It is as if I had been training for this for the last forty years of my
career."

The biggest profits will most likely be made, the former federal bank
officials agreed, by those who figure out a way to benefit from what
could turn into one of the greatest fire sales of bad debt and bank
assets in American history.

Through September of this year, 25 banks had failed, compared with three
in 2007. An additional 171 are on the Federal Deposit Insurance
Corporation's list of troubled banks, more than double the watch list at
the end of last year.

As a result of these failures, and other related industry troubles,
billions of dollars' worth of real estate or at least mortgage-backed
securities and other "illiquid" financial instruments will most likely
need to be sold off at discounted prices to investors who stand to
profit if they can sell the assets at a higher price once the economy
recovers.

The question right now is just how this unloading of bad debt will take
place.

So far, the federal government is relying on financial institutions to
find a way on their own to sell off bad debts or assets they end up with
as a result of foreclosures. But some financial industry players are
arguing that a modern-day RTC should be established, to help set prices
for this bad debt, and speed the move toward a recovery.

The RTC alumni are prepared to profit through either route.

Mr Seidman, for example, has been hired as an adviser to SecondMarket, a
company based in New York that early next year will start a virtual
marketplace that intends to resell some of the trillions of dollars
worth of distressed mortgage-backed securities, the financial
instruments that helped fuel the surge in housing prices.

Mr Seidman has already set up meetings between company executives and
federal regulators, including at the FDIC, said Barry E Silbert, the
company's founder.

Mr Silversmith, meanwhile, who during the savings and loan crisis helped
arrange the sale of thrift assets, has teamed with Barry Fromm, the
chief executive of Value Recovery Holding, one of the big government
contractors who handled these sales. The two in recent weeks have held
meetings with some of Mr Silverstein's former colleagues, including
James Wigand, the deputy director in charge of the FDIC division that
sells seized assets, to work on a plan to get ahold of some of the new
wave of properties the federal government intends to put on the market
as a result of recent bank failures.

Many of the investors who built legendary fortunes during the savings
and loan crisis - like Sam Zell, the chief executive of the Tribune
Company, and Joseph E Robert Jr, the chief executive of J E Robert
Companies - are also looking for ways to get back into or expand their
distressed assets trade.

Mr Zell, who has fared less well in his Tribune investment, recalled the
instinct for capitalizing on the misfortune of others that earned him
the sobriquet "the grave dancer" when he started buying up properties
from failed savings and loans.

"When I started the first opportunity fund in 1988, I was the only one
bidding - if they didn't sell to me, they didn't sell to anyone", Mr
Zell recalled.

Now, he said, "The best opportunity right now is in the debt area,
mortgages. We have been buying all along."

RTC experience is certainly no guarantee of success, the agency veterans
acknowledge.

Peter Monroe, who was president of the RTC oversight board from 1990 to
1993, has already bought about 300 distressed properties in Detroit,
through a venture capital company he formed called Wilherst Oxford.
Figuring out a way to profit from the investment - even though some of
the houses cost him only a few hundred dollars - has proven to be a
challenge.

"It is like a high-hurdle race: you can get going fast, but you have to
jump over one hurdle after the other", Mr Monroe said. "It has turned
out to be more complicated than even I expected".

Copyright 2008 The New York Times Company

http://www.nytimes.com/2008/12/29/us/29bank.html?_r=1


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