Friday, October 21, 2005

A Winner In The S&L Bust

This page in a Forbes piece on Tom Barrack is a flashback to a previous era of massive defaults. "Barrack's biggest payday was around the corner. In the late 1980s he'd arranged for Bass to buy a portfolio of bad loans from American Savings, a failing thrift that the federal government had taken over. Bass paid about $1 billion, less than half the face value of the construction notes, mortgages on office buildings, and other troubled credits."

"Bass and Barrack were able to turn around and sell many of the loans back to the original borrowers at 70 cents or 80 cents on the dollar, earning about $400 million. It was only the beginning of the S&L bust, and Barrack knew the opportunities would be huge. 'He kept saying to me, 'The government will have to take over all these loans,' recalls Bill Rogers, then one of Bass's partners. 'He said we needed to be raising money to get ready for an incredible buying opportunity.' Barrack formed Colony Capital, the first vulture fund for S&L debt, in 1990."

"His timing was perfect. The newly formed Resolution Trust Corp. was desperate to dispose of $350 billion in nonperforming loans, most secured by real estate. Barrack was poised to write a check in 1991 forking over $1 billion for the first major loan package the RTC disbursed."

"Over the next four years he bought package after package. It turned out even better than American Savings had. Owners who were eager to keep their properties bought back their debt for 70 cents or so on the dollar. Any loans Barrack couldn't unload he bundled together and sold on the public markets as mortgage-backed securities."

"As the real estate market recovered, newly formed REITs also devoured his office buildings and shopping centers. By 1995, Barrack had reaped a profit of $2.5 billion. Barrack rolled on, picking up bargains from Japanese investors who had overpaid for prestige U.S. properties."


At 9:36 AM, Blogger Chip said...

I wonder if the Internet and blogging boom will change the dynamics of foreclosure sales. There likely are lots of potential buyers out there that banks could not reach the last time around, effectively or as a practical matter. While it seems to me they ought to be trying to realize the highest price per unit, perhaps they will be so desperate to move large numbers off their books that they once again will sell at heavy discounts to the Barrack types. For that matter, it seems odd to me that the lenders do not hire staff, to create subsidiaries, to do what Barrack did (selling back to the original borrower at a discount) and keep those profits (loss mitigations probably would be a better term) for themselves.

At 12:54 PM, Blogger Ben Jones said...

The banks were staffed with paper pushers, and they certainly couldn't have put together the capital.

I lived in ground zero of the S&L blow-up, and was studying economics at the time; there were no buyers for property apparent. These big guys bought in bulk and could afford to hang on for a few years. It's a good lesson going into the coming bust.

At 5:12 PM, Blogger Chip said...

So maybe this is primarily what the "vulture capital" funds are after?

I always get the feeling that I, as the little guy with my little bag of cash, don't stand much of a chance of profiting from foreclosures, perhaps because the relatively high quality of property I'd be interested in will be only a part of a large bundle sold to Barrack types, not to one-off buyers like myself.

To make matters worse, in a manner of speaking, my wife is taking to renter-life like a spaniel to water.


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