It is the biggest rummage sale in Wall Street history — what one investment company calls “the Great Liquidation.”
Two years after Washington rescued Wall Street, hundreds of billions of dollars of bad investments — in many cases, the same ones that poisoned banks and then the economy — are going up for sale.
Entire financial businesses are being put on the block too, as the giants of finance try to slim down.
The question is what this stuff is worth. Sensing opportunity, hedge funds and private equity firms are lowballing the banks. The haggling has only just begun.
How these sales go, or do not go, could help determine the future of global finance. After all those taxpayer-financed bailouts, broken businesses and investments could pass from banks into private hands.
While banks need to purge themselves of troubled investments or drop profitable businesses they no longer want, the vast shadow financial system, which operates beyond the realm of traditional banks and banking regulators, could move deeper into the shadows if would-be buyers get their way.
“You’re going to see over the next five years, more financial asset liquidations than you’ve seen in the sum total of the last 100 years,” said Peter L. Briger Jr., who oversees $12.7 billion of credit-related private equity and hedge fund investments as co-chairman of the Fortress Investment Group. “If you’re in the market for financial services garbage collection, there’s plenty to do right now.”
Fortress, which coined the Great Liquidation in a report a year ago, has collected a mishmash of financial-related businesses this year, often at reduced prices. From financial firms shedding so-called noncore businesses, Fortress picked up a big stake in the consumer credit arm of the American International Group and a commercial-mortgage servicing business from a unit of a Canadian pension manager.
Fortress also acquired the management rights to oversee pools of certain collateralized debt obligations, or C.D.O.’s, which are among the most troubled investments ever devised; a stake in a struggling Japanese real estate firm; the European mortgage assets and platforms from GMAC, the bailed-out auto finance company; and, more recently, a distressed life settlement portfolio from the Belgian bank KBC.
Other investors are hunting for treasure, too, amid the wreckage of the financial crisis.
Kohlberg Kravis Roberts, another corporate buyout giant, recently snapped up a handful of proprietary traders from Goldman Sachs . Apollo Global Management acquired the real estate investment group of Citigroup . Blackstone bought Bank of America’s Asian real estate fund.
And Goldman, Blackstone and Lone Star Funds have all been sniffing around a $1.6 billion portfolio of Spanish real estate assets being sold by the Royal Bank of Scotland Group as part of an its agreement with British regulators to unload tens of billions of dollars over several years in noncore assets.
“There are definitely lots of deals being shopped,” said Patrick Sweeney, the chairman of the investment management practice group at Herrick, Feinstein.
But as once-unloved assets land in the hands of less regulated entities, some wonder whether more, not less, risk is being introduced into the financial markets.
“Is the world a safer place? I’m not so sure,” said Ernest Patrikis, an insurance and banking regulatory lawyer with the firm White & Case. “There are really questions here of whether, through regulation, we’ve made a commercial banking system that is too riskless and put too much risk into the phantom banking system.”
Other hedge fund managers and lawyers note that, so far, the great liquidation amounts to a trickle.
The nation’s banks are still sitting on hundreds of billions of dollars of mortgage- and real estate-related securities and loans. Despite the most sweeping overhaul of banking rules since the Depression, banks have taken a wait-and-see attitude toward adapting many of the new rules or offloading billions of dollars of troubled securities.
In some cases, the banks are awaiting critical details from regulators about what they may hold on their books or whether certain business activities or holdings will be grandfathered in under the new legislation. In other cases, the banks may believe the worst of the economic stalling and credit crisis is behind them and that, over time, the securities and loans will pay out.
In still many other cases, there is a significant disconnect between what the banks are willing to sell the securities or loans at versus what hedge funds or private equity firms think they are worth.
Take, for instance, commercial real estate loans. The nation’s banks, from giants to tiny community banks, still hold nearly 45 percent, or $1.5 trillion, of commercial mortgage loans outstanding. Other institutions own the rest.
Many of those loans, analysts say, are hardly worth the paper they are written on.
Yet little of such troubled commercial real estate debt is being offered up in the market for sale, analysts say. That is because the banks are holding the debt on their balance sheets at prices much higher than what buyers are willing to pay. If the banks sell the loans for less than they are valued on their books, they will be forced to take write-downs against their losses.
Banks may have their commercial real estate assets or loans valued at 75 or 85 cents on the dollar, and hedge funds and others may be looking to buy closer to 30 or 40 cents on the dollar depending on the level of distress, said Constantine Korologos, a managing director with the real estate consulting practice at Deloitte. “The reality is that it’s probably worth something between the two,” he said.
Still, as one indicator of how quickly private equity or hedge fund firms can turn around a troubled asset or institution, consider the case of the failed Florida lender BankUnited.
About 18 months after it was taken over by the Carlyle Group, Blackstone and the financier Wilbur L. Ross Jr., BankUnited filed plans to raise $300 million in an initial public offering.