An investment group backed by John Paulson, George Soros,
Michael Dell and Christopher Flowers stands to gain more than $3
billion from a bet made on a failed lender during the depths of the
financial crisis.
The group's 2009 purchase of OneWest Bank, formerly known as
IndyMac Bank, will produce a return of 3.35 times its initial
investment, according to people familiar with the deal.
On Tuesday, CIT Group Inc. said it would acquire OneWest for
$3.4 billion in cash and CIT stock, the biggest announced bank
takeover since 2012.
The investment group bought the bank in early 2009 for $1.55
billion. Including the dividends the group collected from OneWest's
earnings in the years since, the investors are due to rake in more
than $5 billion.
IndyMac, based in Pasadena, Calif., collapsed in the summer of
2008 as customers grew concerned about its souring mortgages and
withdrew deposits. It was the third-largest bank failure in U.S.
history.
Regulators at the time were reluctant to allow private-equity
capital to flow into the troubled banking sector but ultimately
approved the deal. As part of IndyMac's sale to the investment
group, which also included Dune Capital Management LP's Steven
Mnuchin, private-equity firm Stone Point Capital LP and an
affiliate of Robert Leeds's Silar Advisors LP, the Federal Deposit
Insurance Corp. agreed to share losses racked up by the bank's
portfolio of toxic loans.
In another big transaction, Carlyle Group LP, Blackstone Group
LP, Centerbridge Partners LP and Wilbur Ross's W.L. Ross & Co.
were among a group that purchased BankUnited Inc. in 2009. The
Miami Lakes, Fla.-based lender went public in 2011.
"There was a period you could do it," said Steven Kaplan, a
finance professor at the University of Chicago's business school.
"There were no strategic buyers who were healthy. It was complete
panic."
But private equity's window for deals would soon all but close,
as the capital markets reopened to banks and the FDIC imposed new
restrictions on private-equity ownership.
In 2012, former FDIC Chairman Sheila Bair said both deals had
drawn scrutiny for the windfalls they produced for private-equity
firms and their investors. Absent strong bids for other banks,
though, the regulator had few choices, she said. Ms. Bair didn't
return a phone call seeking comment Tuesday.
Shareholders of IMB Holdco LLC, OneWest's parent, will receive
$2 billion in cash and 31.3 million CIT shares valued at $1.4
billion. All seven members of the group have remained investors in
OneWest, people familiar with the deal said.
Mr. Paulson is famous for a winning bet against the housing
market, which netted his firm $15 billion in 2007. On Tuesday, he
told clients Paulson & Co. had contributed $400 million to the
investment group, representing a 25% stake. In all, the hedge-fund
firm is in line to collect $1.34 billion in stock and cash on its
investment, according to a person familiar with the matter, more
than triple its initial stake.
Paulson & Co. might retain a portion of its CIT stock from
the deal. In a memo, Mr. Paulson told clients he saw "possible
further upside" in the lender's shares following the
transaction.
"It's good, but I wouldn't call it spectacular," Mr. Kaplan said
of the investment group's profit, noting the stock market has more
than doubled in the past five years. "The government was worried
they'd make 10 to 20 times."
CIT, itself a casualty of the financial crisis, emerged from
bankruptcy protection in 2011. The Livingston, N.J., bank
specializes in commercial lending, and for years has sought to
boost its deposits, which are a steadier source of funding than the
short-term debt the bank often issues.
With Tuesday's transaction, CIT will pick up 73 retail branches
in Southern California from OneWest. Following the deal's close,
CIT said the combination of CIT's banking subsidiary and OneWest
Bank under the name CIT Bank will have $28 billion in deposits. CIT
shares rose 11%, or $4.76, to $48.71 Tuesday.
The deal also will bump up CIT's assets. After the transaction
closes, it will have about $67 billion in assets, making it large
enough to be considered "systemically important" by regulators.
Banks with over $50 billion in assets are subject to stiff rules on
capital and must submit to annual "stress" tests to see how they
would perform during a deep recession. CIT had $44.15 billion in
assets at June 30.
CIT Chief Executive John Thain recently told investors he was
looking for a significant deal so that his firm could jump
comfortably over the $50 billion asset level rather than edge over
it. That is because the avalanche of regulations that comes with
topping $50 billion isn't worth it without a significantly bigger
earnings engine.
"If we had grown to just $52 billion, we would be in the worst
spot," Mr. Thain said in an interview on Tuesday. "We'd have had
all the expense of going over $50 billion but only $2 billion more
of assets to cover the expense base."
On a conference call Tuesday, Mr. Thain said he believes that
CIT is "well-positioned" to satisfy all of the criteria for being a
systemically important financial institution.
On the call, Mr. Thain added he is "confident" the OneWest
purchase will be approved by regulators, noting that the deal adds
deposits. That should ease regulators" concerns about its balance
sheet, he said.
Write to Justin Baer at justin.baer@wsj.com, Saabira Chaudhuri
at saabira.chaudhuri@wsj.com and Rob Copeland at
rob.copeland@wsj.com
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