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From IndyMac to OneWest: Steven Mnuchin's Big Score


Mnuchin surveys the view from OneWest's Pasadena headquarters

Photograph by Joe Pugliese

Mnuchin surveys the view from OneWest's Pasadena headquarters

Steven Mnuchin never dreamed of running a regional bank. He didn’t ever imagine moving to Los Angeles. A true creature of Wall Street—a former Goldman Sachs (GS) partner and active hedge fund manager—he was making plenty of money in New York. Yet he had carefully weighed the risks of buying IndyMac Bank, the Pasadena (Calif.)-based lender that collapsed in 2008. IndyMac’s distressed mortgages and mortgage-backed securities had no place to go but up; the Federal Reserve, through its discount window, was practically giving money away; and Southern California was a rich, relatively underserved banking region. So in December 2008, Mnuchin put together a partnership and bought IndyMac.

Distressed homeowner Rose Gudiel outside Mnuchin's home last OctoberPhotograph by Walt Mancin/Pasadena Star-NewsDistressed homeowner Rose Gudiel outside Mnuchin's home last October

Which is how, one night last October, he found himself trying to explain to his three children why approximately 100 protestors waving “Make Banks Pay” signs had set up camp outside the family’s 21,000-square-foot, $26 million Bel Air mansion. The demonstration was led by a foreclosed homeowner, Rose Gudiel, whose mortgage was serviced by OneWest, the bank Mnuchin and a group of fellow investors built from the ruins of IndyMac. A police helicopter arrived on the scene and cops pushed the protestors to the curb. No arrests were made. Yet five months later the episode rankles. Sitting for a February interview in his corner office in OneWest Bank’s Pasadena headquarters, amid signed photos of Kobe Bryant and Derek Fisher and a six-volume bound set of Federal Deposit Insurance Corp. regulations, Mnuchin stresses one unusual request: that we not publish his home address.

“It was terrible,” he says of those protests. “Something I never want to experience again.”
 
 
In the fall of 2008 very few institutions or individuals were looking to go long on mortgages and mortgage-backed debt. Mnuchin was one. He soon persuaded others, including John Paulson, George Soros, and Chris Flowers. Together they purchased IndyMac, whose primary assets were $23.5 billion in commercial loans, mortgages, and mortgage-backed securities. How risky was the investment? When the FDIC was looking to sell IndyMac, Mnuchin was the only bidder for all of the bank’s assets. He’s since turned OneWest into Southern California’s largest bank, with more than 79 branches and $27 billion in assets. His bet on IndyMac’s portfolio of troubled loans has proved to be a hugely profitable one, as the mortgage market has stabilized. It’s a success story he’s proud of, yet reticent about celebrating too excessively lest those protestors march back up to Bel Air.

Mnuchin, 49, is a thin man with receding black hair. He wears square frame wire glasses and squints at nearly every question he’s asked. He seldom answers those questions directly, instead prefacing his responses with, “What I will say is … ” Sometimes, during the course of a background conversation with a reporter, he will go off the record in the middle of an already off-the-record comment, a sort of triple off-the-record.

“What I’d say is this …” he says when asked about the IndyMac purchase. “In 2008 the world was a scary place. When we agreed to buy the bank, committing capital to the financial system was viewed as a pretty risky proposition.” As he says this, he allows the faintest of grins. Almost as soon as it appears, he suppresses it. Perhaps more than any other lender in the U.S., OneWest has benefited from the transformation of the banking industry since the financial crisis. The question is whether that’s due solely to Mnuchin’s nimbleness and acumen—or whether, from the start, the deck was stacked in his favor.

When the FDIC disposes of an insolvent bank, it has two basic goals: reassuring depositors—and lenders—that the banking system is sound, and minimizing the cost to the insurance fund the FDIC administers. The failed institution is autopsied by regulators and its assets and liabilities are displayed on an intranet site, called InterLINK, where other banks and potential investors can bid on the carcass. The FDIC chooses the winning bid based on an objective criterion it describes as imposing “least cost” to the insurance fund. According to Andrew Gray, an FDIC public information officer, “99.9 percent of the time, this is an orderly process.”

In the case of IndyMac, the process was not orderly. In part because of the depreciation of its mortgage portfolio, the bank reported a liquidity crisis in June 2008. By the end of July depositors had withdrawn nearly 8 percent of the total deposits in the bank. The FDIC took over and operated IndyMac for several months, and by late summer was looking to unload it. IndyMac had not only been an aggressive seller of subprime mortgages, it had also built a large business servicing such mortgages for Fannie Mae (FMCC) and Freddie Mac (FNMA)—and all of those assets were in free-fall. “This was some pretty toxic stuff in there,” says Kendall Raine, executive managing director of Marshall & Stevens, who represented an investor who looked over the IndyMac assets. “You didn’t know how much until you got into the files.” The IndyMac sale became even more difficult when Lehman Brothers, the investment bank the FDIC had hired to advise on the deal, went bankrupt in September 2008.

Eight bidders who met the FDIC’s guidelines performed due diligence on IndyMac’s assets and liabilities. Mnuchin and his group made a $1.55 billion bid for the bank, valuing its assets—loans minus deposits—at $13.9 billion. (Mnuchin, who at the time was running Dune Capital Management, a $3 billion hedge fund, made what he describes as a “significant personal investment.”) The FDIC had agreed to hold some of the more problematic assets; it also wrote into the deal a loss-sharing agreement in which the FDIC would absorb 95 percent of the losses on a portion of IndyMac’s loan portfolio once total losses exceeded 30 percent. “There was no price certainty at that point,” says William Isaac, a former chairman of the FDIC. “The financial markets had ceased functioning, nobody wanted to buy anything. The FDIC had to do a loss-sharing arrangement, but that doesn’t change the fact that this investor group was taking a substantial risk.”

The FDIC would have preferred to sell IndyMac to a bank rather than to a private equity investor like Mnuchin. But in the fall of 2008 the big banks were preoccupied with their own survival. “It’s fair to say had JPMorgan (JPM) or U.S. Bank (USB) been bidding against us we wouldn’t have bought the transaction,” says Mnuchin. He adds, “IndyMac unto itself was not a strategic fit for many banks at the time.”

The business had almost every single problem a bank could have. “It was very, very complicated,” says Mnuchin. “There were big delinquencies in the mortgage-backed loans. It was not well-positioned with its 30-odd branches. Yet we thought we could manage the different aspects of it.”
 
 
Although he may seem an unlikely retail bank chairman, Mnuchin’s career made him an expert on perhaps the most important part of a banker’s job: assessing risk. His father, Robert Mnuchin, was a partner at Goldman Sachs in the 1960s. The second-youngest of five siblings, Steven attended the prestigious Riverdale Country School and then Yale University, where his roommate was Edward Lampert, who would go on to become a hedge fund manager and owner of Sears (SHLD). Mnuchin started his career in the early ’80s as a trainee at Salomon Brothers before moving to Goldman Sachs in 1985. He was front and center for the advent of instruments like collateralized debt obligations (CDOs) and credit default swaps (CDSs), which he calls “an extremely positive development in terms of being able to finance different parts of the economy and different businesses efficiently.” The pitfalls of securitization came later, he says. He spent 17 years at Goldman, working his way up to partner and becoming head of the mortgage department before joining Hank Paulson in the executive suite, becoming the firm’s chief information officer in 1999.

A name change was just part of OneWest's rebranding campaignPhotograph by Gabriel Bouys/AFP/Getty ImagesA name change was just part of OneWest's rebranding campaign

In 2002 he left Goldman to join Lampert’s ESL Investments hedge fund as vice chairman, before starting SFM Capital Management in 2003 with George Soros, who invested $1 billion in the fund. The next year, with two other ex-Goldman partners, he formed hedge fund Dune Capital. Among other things, Dune Capital invested $500 million in a slate of Twentieth Century Fox films, including Avatar.

One of the deals Dune looked at in early 2008 was a distressed portfolio of CDOs being unloaded by Merrill Lynch. Mnuchin worked for a few months on the deal, eventually being outbid by private equity firm Lone Star for $6.7 billion. Still, Mnuchin had seen enough to know that the heavily discounted $31 billion portfolio had been a good value. With the failure of IndyMac, which owned a similar portfolio of residential mortgage-backed CDOs, he recognized an opportunity. “This was something that Steven was steeped in for decades,” says David Fawer, a former mortgage trader who has worked with Mnuchin at Goldman, Dune, and OneWest. “The entire asset base are things we’ve spent a lot of time doing.”

Mnuchin and his team had experience in virtually every aspect of IndyMac, except one: actually running a bank. “I didn’t think I would physically move out here when I did the transaction,” Mnuchin says. Eventually he concluded he couldn’t run the bank from New York, and relocated to the West Coast in 2009. Mnuchin, a Knicks fan, now says he loves the Lakers; OneWest has the exclusive agreement to market Lakers-branded credit and debit cards. He drives from Bel Air to Pasadena in a black Mercedes S-Class hybrid and has developed the Los Angeles habit of making conversation about the best way to get from the west side of Los Angeles to Pasadena, a drive that can take two hours with the wrong timing and a bad route.

From the start, Mnuchin envisioned the building of OneWest as a three-step process. The first was the acquisition of IndyMac itself. The second was to build the bank’s asset base by taking over additional failed banks, including First Federal Bank of California, purchased in 2009, and La Jolla Bank, acquired in 2010, which added over 40 branches to the existing IndyMac branches. To get a foothold in the commercial real estate loan market, OneWest also purchased a $1.4 billion portfolio from Citi Holdings (C) in 2010. From December 2009 to November 2010, OneWest more than doubled its capital base. “That had been the plan from day zero,” Mnuchin says.

The third step was to build market share and rebrand the collection of assets as a new institution, OneWest. Mnuchin admits that branding and running a retail business did not come naturally. Initially, he had not even wanted to rename the bank. “The IndyMac name had a lot of brand recognition, maybe for the wrong reasons, but there was recognition,” Mnuchin says. Once he hired the San Francisco branding firm Landor Associates to come up with a new logo, “it became obvious to me we had to change the name to rebrand the bank.” That rebranding also includes partnerships with the Lakers, the Los Angeles Angels, and the Hollywood Bowl, as well as billboards around Southern California and television spots so beautiful and bland they could be hawking antidepressant medication.

In his office is a large Photoshopped image of a sports stadium with the OneWest logo in a prominent spot; Mnuchin is considering a stadium naming-rights deal. He nods as he looks over at the poster board. When asked if branding is the fun part of his job, he answers, “what I would say is that the branding is more interesting than fun.”
 
 
The man who made his name in mortgages has found them to be the thorniest part of running OneWest. It turns out that owning and servicing mortgages is a very different business from slicing them up and trading them. Mnuchin is sensitive about accusations made by a wide range of industry observers, notably the real estate site Think Big Work Small, that OneWest has been unusually aggressive in foreclosing on its mortgage holders and unwilling to modify those loans. This perception was dramatized in 2011 when homeowner Rose Gudiel, 34, refused to vacate her La Puente (Calif.) home after being declared delinquent in paying her $2,500 monthly mortgage, which was owned by Fannie Mae but serviced by OneWest.

Gudiel tapped into the Occupy Los Angeles movement, which organized the protest in front of Mnuchin’s estate last Oct. 4. OneWest eventually did convince Fannie Mae to agree to modify Gudiel’s mortgage, allowing her to keep her house. Mnuchin says that OneWest’s servicing contracts were purchased from the FDIC and don’t always allow for modifications. “We run them through a waterfall test to see if they qualify,” says Mnuchin. The test factors in the value of the property, the amount due, and the income of the mortgage holder to determine what the mortgage would be worth if foreclosed upon versus what it would be worth modified. “If it is a higher value to modify the loan, then we modify it, as opposed to foreclosing,” he says.

OneWest has been close to its competitors in its percentage of foreclosed properties that end up bank-owned or sold to third parties, with 59 percent in 2009 and 53 percent in 2010, versus industry averages of 54 percent and 53 percent, according to the website ForeclosureRadar. “I don’t think any bank plays particularly nice with their borrowers,” says Raine of Marshall & Stevens. “The rules are when a loan goes bad, here is what you do. There’s not a lot of creativity involved. OneWest’s obligations are to their investors and the FDIC.”

One criticism of OneWest, levied by the editors of sites such as IamFacingForeclosure.com and ZeroHedge.com, is that it profits by pushing homeowners into foreclosure, because the FDIC must reimburse OneWest under the loss-sharing agreement Mnuchin struck when he bought IndyMac. In 2010 a Web video titled “The Great Highway Robbery Continues,” produced by Think Big Work Small, charged that OneWest’s deal with the FDIC encouraged the bank to foreclose in order to trigger the loss-sharing agreement. In response, the FDIC issued a statement that it had not made a single loss-share payment to OneWest. Mnuchin contends that the bloggers’ claims are based on a misreading of the original purchasing agreement. According to Mnuchin, as of the end of 2011, OneWest still had not received any loss-share payments for IndyMac assets. He is unwilling to say whether OneWest would receive such payments in 2012. The FDIC has said that it estimates its total losses on IndyMac to be $10.7 billion.

In part because of the many complications around the mortgage servicing portfolio, Mnuchin no longer sees mortgages as the focus of OneWest’s business. Instead, with the Federal Reserve discount rate at .75 percent, a regional bank can make a killing by lending customers money to do things other than buy property. Mnuchin and his executive team, led by OneWest President and Chief Executive Officer Joseph Otting, a former vice chairman of U.S. Bank, have been steadily expanding the bank’s retail and commercial loan business, taking advantage of what they see as a sweet spot in the banking industry. “Large banks had some problems with their customer perception,” says Otting. “We kind of sit in the middle. We pride ourselves on quick decision-making, access to senior management, and understanding our community. But we have a big enough product suite and large enough balance sheet to handle the needs of the customer.”

Because OneWest was born in the era of the Dodd-Frank reforms, which put a brake on proprietary trading desks and limits the ability of banks to impose transactional fees on debit cards and checking accounts, the bank has concentrated from the start on consumer and business loans. Growth has been spectacular, with the company expanding its commercial loan origination to $4 billion in 2012, more than double the volume of 2011. “These still aren’t normal times,” says Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter. “The major banks are still reluctant to lend in the commercial and consumer arena. This is an opportunity for OneWest.”

Mnuchin sees the opportunity as rich enough to drive earnings growth of 12 percent to 14 percent annually. “It’s a safe, steady business,” says Mnuchin.
 
 
As Mnuchin talks about his vision for the future of his bank, there is still something out of place about him in this Pasadena office. While he eats a turkey sandwich and boasts about some of his initiatives for OneWest—he says it was his idea to revive the old gimmick of giving away toasters with each new checking account and to build a highly visible vault in the Beverly Hills branch—there’s a faint impatience at the sleepy schedule of the regional banker. He and his wife have actively embraced local charitable causes and joined museum boards, as they did in New York. He professes to love Los Angeles. Still, shouldn’t a Master of the Universe, or at least of the mortgaged part of the universe, be back in Manhattan or Greenwich?

He may be paying a visit to Wall Street soon enough. “It will be logical for us to explore going public in 2013,” Mnuchin says. “We will most likely consider an IPO for the bank next year.” Mnuchin and his partners stand to do well in such an offering. BankUnited (BKU), a Florida-based bank bought from the FDIC by a private equity group in 2009 and taken public early last year, has a market capitalization of $2.25 billion on assets of about $11 billion. OneWest, with assets of $27 billion and a more dominant position in a larger regional market, could be worth three times that amount. Such a valuation would give Mnuchin (who refuses to disclose his ownership stake) and his fellow investors a huge return on their 2008 investment. “This is the hardest transaction I’ve ever worked at in my life,” Mnuchin says. “This isn’t something where we just bought this and it happened overnight. This has been three years.”

Mnuchin insists he is committed to California and OneWest. He says he isn’t going anywhere, at least not until the next deal comes along that frightens everyone but him.

With Dakin Campbell
Greenfeld is a Bloomberg Businessweek contributor.

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