Billionaires to buy IndyMac bank

2009-01-05 08:46

Washington - A seven-member investor group including billionaire George Soros and Dell founder Michael Dell have agreed to purchase failed lender IndyMac Bank, one of the largest casualties of the housing bust, for $13.9bn.

IndyMac, which specialised in loans made with little down payment or proof of assets, was seized by the government in July after a run on the bank as the US housing market collapsed. The Federal Deposit Insurance said on Friday that a holding company led by Steven Mnuchin, co-chief executive of private equity firm Dune Capital Management, agreed to buy IndyMac in a deal reached on Wednesday.

The investors have formed a partnership, called IMB Management Holdings LP, that includes Dell's investment firm, MSD Capital. Once the deal closes, the investment group will pour $1.3bn in new capital into IndyMac and continue to operate the Pasadena, California-based bank, the FDIC said.

"We have assembled a group of experienced private investors in financial services to acquire the former IndyMac and operate it under new management with extensive banking experience," Mnuchin said in a statement. "We will inject significant private capital into IndyMac so that it can once again effectively serve its customers and communities."

Investors in the partnership include five private equity firms or hedge funds: JC Flowers & Co.; Stone Point Capital; Paulson & Co.; a fund controlled by billionaire George Soros' Fund Management; and a fund controlled by Silar Advisors.

Dune Capital was founded in 2004 by former Goldman Sachs partners Mnuchin and Daniel Niedich.

Second largest bank failure

J Christopher Flowers, who launched, then dropped, a bid to buy student lender Sallie Mae last year, also is a former Goldman Sachs partner. Paulson & Co. made billions in profits in recent years by betting on the failure of risky home loans.

IndyMac has 33 bank branches in Southern California with about $6.5bn in deposits, about half the company's total at the time of its failure. Other IndyMac assets include a $157.7bn loan servicing business, which collects mortgages and distributes them to investors, and a reverse-mortgage company, known as Financial Freedom.

The failure of IndyMac, which had $32bn in assets, was the second-largest last year, trailing only the September failure of Washington Mutual. Under terms of the sale, the new investors will shoulder the first 20% of the bank's loan losses, with the FDIC agreeing to take on the majority of any losses thereafter. The FDIC said on Friday its bank insurance fund stands to lose $8.5bn to $9.4bn on IndyMac.

The FDIC used a similar loss-sharing agreement when Downey Savings and Loan Association failed in November.

In return, the IndyMac investors agreed to continue a closely watched home-loan modification programme launched by FDIC chairperson Sheila Bair in August that has completed about 8 500 loan modifications so far.

The investors have received preliminary clearance from the federal Office of Thrift Supervision to run the bank as a federal savings association. A final decision is expected in the coming weeks.

Many more banks expected to sink in '09

Thrifts have been the most troubled regulated institutions during the financial crisis and among the most spectacular failures. By law, they must have at least 65% of their lending in mortgages and other consumer loans - making them particularly vulnerable to the housing downturn. Seattle-based thrift Washington Mutual was the biggest bank to collapse in US history, with around $307bn in assets. It was later acquired by JPMorgan Chase & Co. for $1.9bn.

FDIC officials noted that private equity firms have bought up failed institutions before. In the early 1990s, two failed banks - Bank of New England and CrossLand Federal Savings Bank - were sold to private equity firms. The IndyMac deal comes as regulators have eased restrictions on such purchases.

Previously, private-equity firms could not hold more than a 24.9% stake in a bank without becoming a bank-holding company.

A total of 25 US bank failures in 2008 compared with three for all of 2007 and are far more than in the previous five years combined. Many more banks are expected to sink this year.

One unresolved issue is IndyMac's relationship with investors in mortgage-linked securities, including Fannie Mae and Freddie Mac, the government-controlled mortgage finance titans.

Fannie, Freddie and other investors have the right to try to return IndyMac loans if they claim they violate the terms under which they buy mortgages. About $1bn in loans owned or guaranteed by Fannie Mae are in question.

Fannie Mae "is working constructively with the FDIC and IndyMac to reach a resolution that is in the best interests of all parties involved," Fannie spokesperson Chuck Greener said on Friday.

- AP