Features September 9, 2010, 5:00PM EST

The Ballad of 'Large Loan' Verrone

(page 5 of 5)

Yet Verrone and his team did try to limit the damage by selling off Wachovia's remaining loans at bargain prices. "It was 'First bid, best bid,' " he says. In response, Wachovia was deluged with calls from hedge funds and private equity funds that—as Verrone tells it, at least—thought he had lost his mind. He estimates that his group unloaded $7 billion worth of rapidly souring debt in 2007. "I had lunch with someone the other day," he chuckles. "The guy says, 'I'm still trying to work out that loan you sold me.' "

Verrone insists these efforts saved Wachovia, though even if this claim is true, the bank was still encumbered by Golden West's portfolio. In the end, the only way out was the hastily arranged wedding to Wells Fargo. By then, Verrone was gone. In March 2008, Wachovia consolidated its real estate department under Bob Reid, a conservative 30-year Wachovia veteran. Verrone resigned two months later. "I knew I wasn't going to make it under that guy," he says.

In May 2008, after less than a month of unemployment, Verrone was in Tucson, celebrating his 10th wedding anniversary with his wife at an upscale spa, when his cell phone rang. It was Elias Cababie Daniel, head of Cabi Holdings, a development company that had borrowed $1.5 billion the previous year from Wachovia to buy 59 office buildings in Southern California. Now Cabi was having trouble paying off the debt. The developer was flying from California that night to Mexico. Could he stop in Tucson and see Verrone?

Verrone took a cab to the airport and met with Daniel in one of the hangars. Verrone says the developer pleaded with him to serve as a restructuring consultant on the deal. Ten days later, Verrone took the assignment. "I always try to help my clients," he says. "It wasn't his fault the world fell apart."

Verrone didn't succeed in getting a deal done that would enable his client to keep his buildings. He'd sliced the debt into so many pieces it was impossible to get all the holders to agree on a restructuring plan. "We tried," he says. "But there were 11 different lenders on the deal. Ten agreed. One didn't, so the borrower had to hand back the keys." Cabi Holdings has since filed a lawsuit in California against Wachovia and the other borrowers over the failed deal, claiming breach of goodwill. The developer's lawyer declined comment. Wachovia, in court documents, denies wrongdoing.

It wasn't long before Verrone, who is now divorced, was spending all his time restructuring deals like this. The securitization system that he had helped pioneer had never weathered anything like the financial collapse of 2008. Now it would be severely tested. Wachovia and its competitors had structured their bond offering so that third parties called "special servicers" stepped in when borrowers couldn't pay. Before the crash, it was a pretty easy job. Delinquency rates, after all, were less than 1 percent. Since the real estate bubble burst, delinquencies have soared to 8.5 percent this year, according to Trepp.

Even though the second crash that Roubini and others predicted hasn't come to pass, that doesn't mean there hasn't been chaos in commercial real estate. Special servicers are swamped with busted deals. "No one thought the system would implode," says Norman Radow, founder of Radco Development Solutions, a firm that manages property for banks that have foreclosed on real estate loans. "The special servicers are playing catch-up."

For developers, it was often an ordeal just to get these loan officers on the phone. Verrone found that if he just kept calling and working his connections, he could cut a path through the red tape. Executive Capital's Ratzer says Verrone did exactly that with a $24million loan from Wachovia to his firm that was coming due this year and tucked away inside an enormous securitization. "We couldn't get anybody to return our calls," Ratzer says. "I said, 'Robert, do you know anybody at Wachovia?' He said, 'A lot of people have changed, but I know the system.' "

Iron Hound has done similar interventions for Joseph Moinian. The New York developer—one of Verrone's most acquisitive clients during the boom—is now fighting to keep his empire intact. In January, Moinian announced that Verrone had helped him restructure the debt on two of his Manhattan trophies. "Robert understands the loan documents," says the developer. "Robert negotiated the same set of documents a hundred times. He has been a great translator of what the other side expects."

The irony of his situation is not lost on Verrone. "This job is making me a better banker," he says. "We are seeing what happens when things go wrong." He adds: "Anyone who wants to get into this business and thinks it's easy, each loan takes 6 to 18 months to work out. And they are never easy."

Verrone is watching the apparent rebirth of the commercial real estate bond business—and thinking about heading back to Wall Street if things pick up. "We love our little Iron Hound gig," he says. "It's been great. But at some point, maybe we go back to a big shop and rebuild the lending business based on what we've learned." In other words, it may not be long before Verrone is once again throwing parties, quoting The Godfather, and disarming clients with tales of his Jersey roots. To show he has been properly chastened, the banker says he may hold his parties on the roof of the Marriott this time around. Then he changes his mind. "I'd rather go to a party at the Hudson," he says. When Large Loan Verrone starts partying on the roof, you'll know the next commercial real state cycle has begun.

Leonard is a reporter for Bloomberg Businessweek in New York.

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