Private Equity Makes Mr. Potter of It’s A Wonderful Life Look Like FDR

IndyMac was one of the biggest bank failures in history. Its failure provided vivid visuals of anxious depositors standing in line hoping to withdraw their money.

The FDIC (as is its mandate) took it over, cleansed it of bad loans through asset sales and write-downs which shrunk its debt by 27%, then fired 45% of its employees.

It sold it to a private equity club consisting of the hedge funds of some of the biggest names in finance: J. Christopher Flowers, George Soros, John Paulson (famous for making billions betting on the subprime mortgage collapse) and Michael Dell of Dell Computers. The FDIC also agreed to take most of the risk on future loan losses.

This club paid $1.5 billion and renamed it OneWest Bank. In early December it bought another failed bank, the First Federal Bank of California with its profits. With that purchase, OneWest doubled its number of branches to 72, increased its assets to $24 billion and made it the largest bank in southern California.

So what’s the problem with private equity gobbling up all the failed banks, of which there were more than 140 in 2010?

Private equity takes over a company using leverage, pays its owners off the top, piles the debt on top of the company, strips it down (fires everyone and culls expenses), takes it public and leaves it in shambles.

That’s certainly the modus operandi of J. Christopher Flowers, who made a fortune at Goldman Sachs while still in his twenties, founding its financial services merger business. He organized the $62 billion merger of Nationsbank and BankAmerica creating what became Bank of America, among other financial mergers. He left GS in 1998 to start his own business.

In 2000 he bought the failed Long-Term Credit Bank of Japan from the Japanese government, renaming it Shinsei Bank. He made billions when he took it public four years later. The Japanese government never recouped the trillions of yen it spent bailing out the failed bank. Now it’s teetering on the brink again because of bad investments in subprime mortgages and exposure to the bankrupt Lehman Brothers.

Flowers is not shy about his motives. He told an investor forum in New York back in January that “the government has all the downside and we have all the upside.” Bank failures are a golden opportunity for private equity owners like him. “Lowlife grave dancers like me will make a fortune.”

There are several current converging factors: the ineffectual approach to foreclosures by both the Bush and the Obama administration, which led to the acceleration of failed banks; the coming collapse of commercial real estate mortgage backed securities; the FDIC insurance fund is in the red; and private equity is one of the only financial entities with enough cash reserves to infuse money into the banking system. Flowers bragged that he could raise $10 billion in 48 hours.

OneWest protests that its motives are not merely money. It announced the creation of the $10 million OneWest Foundation to support neighborhood activities. Its chairman, Steve Mnuchin, attended a Christmas toy drive at a youth center with Governor Schwarznegger at the same time OneWest was pasting its name on the former First Financial branches.

But its behavior in mortgage modifications was so egregious that a judge in New York cancelled the $525,000 mortgage debt of a Long Island couple it was trying to evict, citing its “harsh, repugnant, shocking and repulsive acts.” Suffolk Judge Jeffrey Spinner chastised OneWest for misleading him about the amounts owed and for its ill-treatment of the couple involved. Spinner wrote that OneWest’s conduct was “inequitable, vexations and opprobrious.” He took the extraordinary step of cancelling the debt because the bank “must be appropriately sanctioned so as to deter it from imposing further mortifying abuse against [the couple].”

OneWest also has garnered bad PR in Oakland, California, where it has tried to foreclose on an 89-year-old woman. Twice, local courts have told the bank to cease and desist. Irene Jones is now suing OneWest for title of her home, plus $350,000 for elder abuse, negligence, distress and suffering. Jones claims the bank’s harassment exacerbated her late husband’s depression and anxiety, helping cause his death.”

J. Christopher Flowers makes Mr. Potter in It’s A Wonderful Life look like FDR. Private equity owners were also among the riskiest speculators precipitating the ongoing economic crisis. Oh brother if they take over all the failed banks, JP Morgan himself would applaud his second coming.