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Sinking IndyMac sought lifelines

The bank failed to find investors before it was seized by regulators.

July 26, 2008|E. Scott Reckard | Times Staff Writer

Just as "Iron Man" was scaling new heights at the box office in May, executives at IndyMac Bank were attempting last-minute heroics to save the faltering Pasadena mortgage lender.

Their effort, dubbed Project Iron Man, was a bid to assemble a group of private-equity firms to pump cash into IndyMac and become its controlling shareholders. The endeavor sheds some light on why regulators permitted the savings and loan to continue in business until a run on deposits finally triggered a government takeover July 11. The failure is expected to cost the Federal Deposit Insurance Corp. $4 billion to $8 billion.

At the time of the FDIC takeover, "we were working closely, but privately, with our regulators and with potential sources of capital," said Evan Wagner, a spokesman for the institution the FDIC has renamed IndyMac Federal Bank.

JPMorgan Chase & Co., which IndyMac had hired as its advisor, had circulated an Iron Man Working List naming representatives of more than a dozen private-equity firms and other companies it hoped might invest in the thrift. The 37-page list, obtained by the Los Angeles Times, included such investment firms as Thomas H. Lee Partners, Ares Management, Golden Gate Capital, Taconic Capital Advisors and Stone Point Capital.

In addition to its now-shuttered home-loan business, IndyMac had 33 branches, a bill-collecting arm and a reverse-mortgage company, which allowed older people to tap the equity in their homes.

"We were talking with a bunch of potential investors in the weeks before the shutdown," said an IndyMac source close to the effort who was not authorized to speak publicly.

The goal was to "keep the bank intact," the source said. If that didn't work, "we could have sold off pieces of the business. We didn't want to cannibalize the company, but that was the next option."

Sources at the bank and among potential bidders were guarded in discussing the effort, citing confidentiality agreements and the fact that some of the firms involved may participate in the FDIC's planned auction of IndyMac, which the agency hopes to accomplish in 60 to 90 days.

Project Iron Man appears to have reached only the initial stages when U.S. Sen. Charles E. Schumer (D-N.Y.) publicly questioned IndyMac's stability in late June and criticized regulators' lack of action. His remarks spooked some depositors, and IndyMac customers withdrew $1.3 billion in 11 days, even as private-equity firms were reviewing IndyMac's operations behind the scenes.

One firm on the list was Oaktree Capital Management, a Los Angeles investor in distressed companies. A person familiar with Oaktree's involvement said the firm did look at IndyMac, but only as "they look at a million things," and indicated Oaktree had not delved deeply into the bank's books at the time of Schumer's statements.

IndyMac's capital-raising overtures to private-equity firms came after a series of cost-cutting moves, including layoffs and dividend cuts. But by March, analysts such as Keefe, Bruyette & Woods Inc.'s Frederick Cannon were warning that the company needed to raise new capital.

Another prospect on the Iron Man list, whose company decided not to go through IndyMac's books, noted that the bank needed fresh capital just to survive. But private-equity firms want to see a clear path to growth or cost savings so they can resell the target company.

"It doesn't help that a lot of well-publicized investments in distressed companies have not performed very well," Cannon said. "It's tough to pick the bottom of a market like this."

Nevertheless, Scott M. Polakoff, senior deputy director of the Office of Thrift Supervision, IndyMac's chief regulator, said federal officials were "encouraged" when IndyMac reported to them last quarter that "various parties" were on-site to review its books and be briefed on its businesses.

Before Schumer's remarks, Polakoff said, "this was not an institution that was facing a critical shortage of capital." IndyMac had about $2 billion in capital and reserves before the run on deposits, he noted.

Schumer's office didn't return calls seeking comment on charges he had hastened IndyMac's downfall. He previously has said that IndyMac dug its own grave by making overly risky loans for years that could not withstand the harsh deflation of the housing bubble. He also has criticized regulators for not acting earlier.

Whether there were any serious bidders for IndyMac is unclear. Private-equity firms that invested in other troubled lenders have seen little return on their money.

For instance, shares of Washington Mutual Inc. of Seattle, a giant S&L battered by the meltdown in the housing and credit markets, were trading at $11.80 when investors, led by TPG Capital, committed $7.2 billion to the thrift April 8.

The stock has since plummeted, closing at $3.84 Friday, costing the private-equity groups about two-thirds of their investment in a little more than three months.

Another struggling mortgage lender, Downey Financial Corp. of Newport Beach, also is talking with private-equity groups about raising capital, sources said Friday.

The prospective investors include New York's MatlinPatterson, whose investments recently helped jumbo loan specialist Thornburg Mortgage Inc. and home builder Standard Pacific Corp. avert bankruptcies.

Cannon, the analyst, said disposing of IndyMac now could be a "tough sell" for the FDIC, which may have to let many high-yielding certificates of deposit expire before a buyer is willing to take over the branches and deposits.

To hang on to its base of funds, IndyMac kept its CD rates above 4% right up until it was seized, Cannon said.


Times staff writers Tom Petruno and William Heisel contributed to this report.

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