TMST Inc. (fka THMRQ)

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http://hedgefundsmarts.blogspot.com/2009/01/matlin-patterson-finances-financials.html

Friday, January 2, 2009
Matlin Patterson Finances the Financials
Chidem Kurdas, Jan 2, 2009

Matlin Patterson Global Advisers has become a source of capital for financial firms and looks to be a player in restructuring the crisis-stricken financial industry. That’s the impression one gets from its deals with savings bank Flagstar and mortgage originator Thornburg.

Flagstar Bancorp will issue preferred stock to a Matlin Patterson fund without getting shareholder approval. It has an exemption from the New York Stock Exchange because “the delay necessary in securing shareholder approval for the consummation of the stock issuance would seriously jeopardize the financial viability of Flagstar,” as the bank put it.

Upon the completion of the transaction, Matlin Patterson will own about 70% of Flagstar's outstanding stock and have the right to name more than a majority of its board members. The deal enhanced Flagstar’s position with banking regulators and the Treasury, which tentatively approved the bank for the TARP Capital Purchase Program.

In March 2008 Matlin Patterson led a $1.35 billion rescue of Thornburg Mortgage. David Matlin and Mark Patterson, the distressed securities specialists who founded the investment firm, sit on Thornburg’s board.

Now the buzz is that Flagstar and Thornburg will merge, the TARP-backed bank will finance the troubled mortgage business and Matlin Patterson will sell its cheaply bought shares at an impressive profit.

This is a complicated process that can backfire—you have to get on both boards, merge or otherwise link the businesses, have at least one of them obtain cheap government money, and then wait till the stock recovers. But if the model works, Matlin Patterson can do more deals of the same kind. It has the capital, having raised a $5 billion new fund to invest in distressed companies.

That was in 2007, but Matlin Patterson did not invest then because distressed securities were not sufficiently discounted. It started to invest in 2008 and will likely find other opportunities in 2009.

A new report from consulting firm Celent points that since traditional sources of finance are no longer available or too expensive, financial companies may find alternative sources as private equity firms allocate a higher percentage of their funds to such investments.

Matlin Patterson appears to be in the vanguard of that trend. It will presumably push financial firms to consolidate. Compared to Cerberus with its Chrysler and GMAC interests, Matlin Patterson is involved in businesses that have a reasonable chance of long-term success.

Funny, though, that after all the talk about taxing private equity managers, the middle class taxpayer ends up signing checks to bail out private equity-controlled companies. It looks like the beginning of a new strategy: TARP Arbitrage.