AI
Tuesday, January 17, 2017 9:05:07 PM
Treasury Pick Steven Mnuchin, Like His Would-Be Boss Donald Trump,
Followed His Own Rules
While at OneWest, Mr. Mnuchin tried to persuade regulators to sell him
a California thrift that hadn’t failed yet
Steve Mnuchin outside the Eisenhower Executive Office Building last Friday.
His turnaround of OneWest Bank was cited as a sign of his qualifications for
Treasury secretary by President-elect Donald Trump. PHOTO: MICHAEL
By KIRSTEN GRIND, RACHEL LOUISE ENSIGN and ANNAMARIA ANDRIOTIS
Updated Jan. 17, 2017 4:44 p.m. ET
First Federal Bank of California executives knew their thrift was in deep trouble but thought they had time to try to save it.
They didn’t know that Steven Mnuchin, the chairman of OneWest Bank and now President-elect Donald Trump’s pick as Treasury secretary, had been trying to persuade federal regulators to sell First Federal to him. That would require the government to decide the problems were deep enough to seize the thrift, even though its executives had been given a March 2010 deadline to raise additional capital, according to people familiar with the matter.
On a Friday afternoon in December 2009, regulators swooped in and shut down First Federal, one of the largest savings institutions in California. At a branch in the thrift’s hometown of Santa Monica, employees were told that OneWest was now in charge. Mr. Mnuchin soon arrived at First Federal’s headquarters.
When the Senate considers Mr. Mnuchin’s nomination Thursday, Democrats are likely to scrutinize his role in foreclosing on homeowners, particularly from failed IndyMac Bank, which he also bought from the federal government.
Mr. Mnuchin has said OneWest did what it could, but some home seizures were unavoidable because it inherited “the worst mortgage portfolio in the history of time.” (Click here to read a Q&A about Mr. Mnuchin’s role.)
The acquisition of First Federal, by contrast, has been relatively overlooked, even though it was a big reason for OneWest’s eventual success. It shows an executive willing to push outside normal channels, according to more than two dozen interviews with former executives and employees of OneWest and First Federal, former and current regulators, and government and company documents.
While most bankers waited until a formal bidding process to signal their interest in buying failed financial institutions, Mr. Mnuchin told the Federal Deposit Insurance Corp. before then about his strong interest in First Federal, these people say. He had been doing the same for months with the thrift’s primary regulator, the Office of Thrift Supervision, which had the authority to decide whether to close First Federal, the people add.
Those traits and results sound a lot like his new boss, Mr. Trump, who has cited the transformation of OneWest after Mr. Mnuchin took over as evidence of his qualifications.
The First Federal acquisition allowed Mr. Mnuchin, a former Goldman Sachs Group Inc. partner, and his management team to double the size of their branch network and move into higher-end areas of Southern California, accelerating OneWest’s shift toward catering to high-income clients and commercial loans.
At the end of 2014, OneWest had more than $6 billion of business, commercial real-estate and multifamily property loans on its books, up from practically none when Mr. Mnuchin’s management team took over.
CIT Group Inc. agreed in July 2014 to buy OneWest for $3.4 billion, a return of more than $3 billion, including dividends. Mr. Mnuchin’s take was hundreds of millions of dollars, according to a person familiar with the matter.
Federal regulators say Mr. Mnuchin didn’t influence their decision to seize and sell First Federal, adding that the severity of the financial crisis was a major factor in the closure. A Treasury Department review said the failure was caused by First Federal’s risky loan strategy.
A First Federal Bank of California branch in Los Angeles in January 2009. After its seizure by regulators, the thrift was sold to OneWest Bank but has caused no losses to the deposit-insurance fund. PHOTO: REED SAXON/ASSOCIATED PRESS
First Federal was founded in 1929 and known as a community-centric financial institution where tellers knew their customers’ names. Its directors included actress June Lockhart, who played the mother in the “Lassie” television series. Many of the thrift’s 600 employees worked there for a decade or more.
In the early 2000s, First Federal expanded heavily into option adjustable-rate mortgages, a type of loan that allowed a borrower to pay little for years while increasing the loan’s balance. The thrift typically required little documentation.
More than $400 million in bad loans piled up by early 2009. Shares of the thrift’s parent company dropped so much they were in danger of being delisted.
The OTS ordered First Federal to increase capital levels by September or it would have to try to sell itself. In a worst-case scenario, First Federal would have to liquidate.
First Federal executives raced to modify shaky loans, handing out free-gas cards to borrowers to encourage them to contact call-center representatives and sign new paperwork. The thrift also stopped originating most types of mortgages.
Across the U.S., regulators shut down more and more banks as the financial crisis spread. The closings typically happened on Friday afternoons, so buyers could convert computer systems over the weekend and reopen Monday morning. The death count in 2009 was 140, according to the FDIC.
At the Pasadena, Calif., headquarters of OneWest, Mr. Mnuchin had a goal: buy as many failed banks as possible, increase his bank’s financial strength and value, and then sell OneWest later or take it public, say people familiar with his plans. Within a year of taking over IndyMac, he had bid for six other failing lenders and won two of them.
Customers line up at an IndyMac Bank branch in Santa Monica, Calif., in 2008. After IndyMac failed, it was sold by the government to OneWest and eventually helped earn Steven Mnuchin hundreds of millions of dollars.
Customers line up at an IndyMac Bank branch in Santa Monica, Calif., in 2008. After IndyMac failed, it was sold by the government to OneWest and eventually helped earn Steven Mnuchin hundreds of millions of dollars. PHOTO: GABRIEL BOUYS/AGENCE FRANCE-PRESSE/GETTY IMAGES
OTS officials were skeptical of Mr. Mnuchin and his team at first, largely because he had never run a bank before.
“I want to know that I can depend on you not to break this,” a senior regulator warned Mr. Mnuchin at an initial meeting after the IndyMac purchase. The regulator added about IndyMac: “It’s a major situation, and it’s a high-profile place. I don’t want you screwing it up on our watch.”
Mr. Mnuchin sought to reassure the OTS official. “We’re going to have a great relationship,” he said, according to a person familiar with the meeting. “I understand what you have given me. And it’s not a bank, it’s a position of trust.”
First Federal became his chief acquisition target. The thrift had 39 branches and $4.5 billion of deposits, and loan delinquencies declined for several months in 2009, an encouraging sign. But it missed a September capital-raising deadline imposed by the OTS. First Federal began exploring the possibility of selling itself.
Executives hosted a handful of rivals at its headquarters, allowing the visitors to scour financial records to lay the foundation for a possible purchase. When Mr. Mnuchin sent a team from OneWest, it was kicked out by First Federal executives, say people who were there. The process was supposed to be secret, but First Federal executives believed Mr. Mnuchin’s team was leaking information to the press.
People close to Mr. Mnuchin say he believed it would be less risky to buy First Federal as part of a seizure, since a government backstop could protect investors.
By December 2009, he instructed several executives to review First Federal’s financial statements, regulatory filings and other records to determine a possible bid, says one person familiar with the matter.
Almost everything went through him. He was the kind of deal maker who would “know the cost of every pencil,” says one former regulator.
OneWest’s chairman shunned the limelight and cherished his privacy. OneWest paid for security services at his home.
When he got divorced, Mr. Mnuchin asked a court to keep his home address out of public records, saying his position subjected him to “public ire at the banking industry in general.”
In early December 2009, First Federal missed another capital-raising deadline, this time to raise $515 million. First Federal President James Giraldin called a top OTS official in Washington. “Please,” he pleaded, on the verge of tears, according to a person with knowledge of the call. “I’m begging you, give us a chance.”
OTS and FDIC officials met with members of First Federal’s board of directors and executives to discuss the future. Directors were met with blank stares from regulators but left the meeting feeling it had gone well.
A week later, an OTS examiner called First Federal with news that it would get until March 31 to raise capital, say people familiar with the matter. There was one condition: First Federal’s chief executive, Babette Heimbuch, had to resign. She did immediately. The government still had the power to seize First Federal if its financial condition deteriorated in the eyes of regulators.
Mr. Mnuchin repeatedly made sure regulators knew he was an interested buyer. “If a large institution in this area comes up for bid, I want to know about it,” he once told OTS examiners, says a person familiar with the conversation. “We’re in the business of buying failed banks.”
Throughout the financial crisis, banks interested in bidding on failing institutions were put on a list kept by the FDIC, which wanted to minimize payouts from its deposit-insurance fund. Potential bidders would receive an alert when a bank or thrift was up for sale, which meant it was about to be seized by regulators.
Bidders could then log on to a secure website for access to the failing institution’s financial information. Names of failing banks usually were kept secret to prevent a customer run.
OneWest Bank Vice Chairman Brian Brooks, Chairman Steven Mnuchin, Chief Executive Joseph Otting and Vice Chairman David Fawer in July 2011.
The FDIC hadn’t begun the bidding process for First Federal, but Mr. Mnuchin talked to someone he knew at the agency about his interest in the thrift. Around the same time, an FDIC official called the OTS and said OneWest wanted to bid for First Federal, according to people familiar with the matter.
It was common for bankers to express interest in buying troubled institutions during the financial crisis, but Mr. Mnuchin was particularly persistent, regulators say.
While officials at the OTS thought First Federal should get more time, the FDIC ran the sale process and had the larger goal of protecting the deposit-insurance fund. The financial crisis already had caused the steepest losses in decades.
Both agencies eventually agreed to close First Federal, partly because they were losing confidence that it could raise the additional capital.
OneWest put together a bid package within hours. Five other banks and private-equity firms also were interested because First Federal was in better shape than many other failing lenders. People’s United Bank, a unit of People’s United Financial Inc., based in Bridgeport, Conn., made what it thought was a winning bid, say people familiar with the offer.
Mr. Mnuchin topped People’s United by $700 million, offering $400 million more than the amount of assets First Federal had at the time. It was one of only about a half-dozen deals during the crisis when a bidder offered to pay a premium.
On Dec. 16, 2009, Mr. Mnuchin and about 30 OneWest executives sat down with FDIC officials in Orange County, Calif. The FDIC said if First Federal was shut down later that week, the plan was to hand it to OneWest as the winning bidder.
At First Federal, executives suddenly were having trouble contacting any of their regulators and were worried.
On the morning of Friday, Dec. 18, OneWest executives were dispatched in groups to wait for instructions. One team waited near First Federal’s headquarters.
A separate group of about 50 executives gathered at a strip mall in Marina del Rey and decided to split up because they didn’t want to risk being noticed by First Federal employees. Some of the OneWest employees went to a restaurant and others to a coffee shop.
At about 3 p.m., one of the executives at the strip mall received a call from OneWest headquarters. OneWest had officially won the bid for First Federal.
“First Federal was our No. 1 strategic target,” Mr. Mnuchin told The Wall Street Journal at the time.
The FDIC estimated that First Federal’s failure would cost the deposit-insurance fund $146.3 million. The actual losses turned out to be zero.
—Lisa Schwartz contributed to this article.
Followed His Own Rules
While at OneWest, Mr. Mnuchin tried to persuade regulators to sell him
a California thrift that hadn’t failed yet
Steve Mnuchin outside the Eisenhower Executive Office Building last Friday.
His turnaround of OneWest Bank was cited as a sign of his qualifications for
Treasury secretary by President-elect Donald Trump. PHOTO: MICHAEL
By KIRSTEN GRIND, RACHEL LOUISE ENSIGN and ANNAMARIA ANDRIOTIS
Updated Jan. 17, 2017 4:44 p.m. ET
First Federal Bank of California executives knew their thrift was in deep trouble but thought they had time to try to save it.
They didn’t know that Steven Mnuchin, the chairman of OneWest Bank and now President-elect Donald Trump’s pick as Treasury secretary, had been trying to persuade federal regulators to sell First Federal to him. That would require the government to decide the problems were deep enough to seize the thrift, even though its executives had been given a March 2010 deadline to raise additional capital, according to people familiar with the matter.
On a Friday afternoon in December 2009, regulators swooped in and shut down First Federal, one of the largest savings institutions in California. At a branch in the thrift’s hometown of Santa Monica, employees were told that OneWest was now in charge. Mr. Mnuchin soon arrived at First Federal’s headquarters.
When the Senate considers Mr. Mnuchin’s nomination Thursday, Democrats are likely to scrutinize his role in foreclosing on homeowners, particularly from failed IndyMac Bank, which he also bought from the federal government.
Mr. Mnuchin has said OneWest did what it could, but some home seizures were unavoidable because it inherited “the worst mortgage portfolio in the history of time.” (Click here to read a Q&A about Mr. Mnuchin’s role.)
The acquisition of First Federal, by contrast, has been relatively overlooked, even though it was a big reason for OneWest’s eventual success. It shows an executive willing to push outside normal channels, according to more than two dozen interviews with former executives and employees of OneWest and First Federal, former and current regulators, and government and company documents.
While most bankers waited until a formal bidding process to signal their interest in buying failed financial institutions, Mr. Mnuchin told the Federal Deposit Insurance Corp. before then about his strong interest in First Federal, these people say. He had been doing the same for months with the thrift’s primary regulator, the Office of Thrift Supervision, which had the authority to decide whether to close First Federal, the people add.
Those traits and results sound a lot like his new boss, Mr. Trump, who has cited the transformation of OneWest after Mr. Mnuchin took over as evidence of his qualifications.
The First Federal acquisition allowed Mr. Mnuchin, a former Goldman Sachs Group Inc. partner, and his management team to double the size of their branch network and move into higher-end areas of Southern California, accelerating OneWest’s shift toward catering to high-income clients and commercial loans.
At the end of 2014, OneWest had more than $6 billion of business, commercial real-estate and multifamily property loans on its books, up from practically none when Mr. Mnuchin’s management team took over.
CIT Group Inc. agreed in July 2014 to buy OneWest for $3.4 billion, a return of more than $3 billion, including dividends. Mr. Mnuchin’s take was hundreds of millions of dollars, according to a person familiar with the matter.
Federal regulators say Mr. Mnuchin didn’t influence their decision to seize and sell First Federal, adding that the severity of the financial crisis was a major factor in the closure. A Treasury Department review said the failure was caused by First Federal’s risky loan strategy.
A First Federal Bank of California branch in Los Angeles in January 2009. After its seizure by regulators, the thrift was sold to OneWest Bank but has caused no losses to the deposit-insurance fund. PHOTO: REED SAXON/ASSOCIATED PRESS
First Federal was founded in 1929 and known as a community-centric financial institution where tellers knew their customers’ names. Its directors included actress June Lockhart, who played the mother in the “Lassie” television series. Many of the thrift’s 600 employees worked there for a decade or more.
In the early 2000s, First Federal expanded heavily into option adjustable-rate mortgages, a type of loan that allowed a borrower to pay little for years while increasing the loan’s balance. The thrift typically required little documentation.
More than $400 million in bad loans piled up by early 2009. Shares of the thrift’s parent company dropped so much they were in danger of being delisted.
The OTS ordered First Federal to increase capital levels by September or it would have to try to sell itself. In a worst-case scenario, First Federal would have to liquidate.
First Federal executives raced to modify shaky loans, handing out free-gas cards to borrowers to encourage them to contact call-center representatives and sign new paperwork. The thrift also stopped originating most types of mortgages.
Across the U.S., regulators shut down more and more banks as the financial crisis spread. The closings typically happened on Friday afternoons, so buyers could convert computer systems over the weekend and reopen Monday morning. The death count in 2009 was 140, according to the FDIC.
At the Pasadena, Calif., headquarters of OneWest, Mr. Mnuchin had a goal: buy as many failed banks as possible, increase his bank’s financial strength and value, and then sell OneWest later or take it public, say people familiar with his plans. Within a year of taking over IndyMac, he had bid for six other failing lenders and won two of them.
Customers line up at an IndyMac Bank branch in Santa Monica, Calif., in 2008. After IndyMac failed, it was sold by the government to OneWest and eventually helped earn Steven Mnuchin hundreds of millions of dollars.
Customers line up at an IndyMac Bank branch in Santa Monica, Calif., in 2008. After IndyMac failed, it was sold by the government to OneWest and eventually helped earn Steven Mnuchin hundreds of millions of dollars. PHOTO: GABRIEL BOUYS/AGENCE FRANCE-PRESSE/GETTY IMAGES
OTS officials were skeptical of Mr. Mnuchin and his team at first, largely because he had never run a bank before.
“I want to know that I can depend on you not to break this,” a senior regulator warned Mr. Mnuchin at an initial meeting after the IndyMac purchase. The regulator added about IndyMac: “It’s a major situation, and it’s a high-profile place. I don’t want you screwing it up on our watch.”
Mr. Mnuchin sought to reassure the OTS official. “We’re going to have a great relationship,” he said, according to a person familiar with the meeting. “I understand what you have given me. And it’s not a bank, it’s a position of trust.”
First Federal became his chief acquisition target. The thrift had 39 branches and $4.5 billion of deposits, and loan delinquencies declined for several months in 2009, an encouraging sign. But it missed a September capital-raising deadline imposed by the OTS. First Federal began exploring the possibility of selling itself.
Executives hosted a handful of rivals at its headquarters, allowing the visitors to scour financial records to lay the foundation for a possible purchase. When Mr. Mnuchin sent a team from OneWest, it was kicked out by First Federal executives, say people who were there. The process was supposed to be secret, but First Federal executives believed Mr. Mnuchin’s team was leaking information to the press.
People close to Mr. Mnuchin say he believed it would be less risky to buy First Federal as part of a seizure, since a government backstop could protect investors.
By December 2009, he instructed several executives to review First Federal’s financial statements, regulatory filings and other records to determine a possible bid, says one person familiar with the matter.
Almost everything went through him. He was the kind of deal maker who would “know the cost of every pencil,” says one former regulator.
OneWest’s chairman shunned the limelight and cherished his privacy. OneWest paid for security services at his home.
When he got divorced, Mr. Mnuchin asked a court to keep his home address out of public records, saying his position subjected him to “public ire at the banking industry in general.”
In early December 2009, First Federal missed another capital-raising deadline, this time to raise $515 million. First Federal President James Giraldin called a top OTS official in Washington. “Please,” he pleaded, on the verge of tears, according to a person with knowledge of the call. “I’m begging you, give us a chance.”
OTS and FDIC officials met with members of First Federal’s board of directors and executives to discuss the future. Directors were met with blank stares from regulators but left the meeting feeling it had gone well.
A week later, an OTS examiner called First Federal with news that it would get until March 31 to raise capital, say people familiar with the matter. There was one condition: First Federal’s chief executive, Babette Heimbuch, had to resign. She did immediately. The government still had the power to seize First Federal if its financial condition deteriorated in the eyes of regulators.
Mr. Mnuchin repeatedly made sure regulators knew he was an interested buyer. “If a large institution in this area comes up for bid, I want to know about it,” he once told OTS examiners, says a person familiar with the conversation. “We’re in the business of buying failed banks.”
Throughout the financial crisis, banks interested in bidding on failing institutions were put on a list kept by the FDIC, which wanted to minimize payouts from its deposit-insurance fund. Potential bidders would receive an alert when a bank or thrift was up for sale, which meant it was about to be seized by regulators.
Bidders could then log on to a secure website for access to the failing institution’s financial information. Names of failing banks usually were kept secret to prevent a customer run.
OneWest Bank Vice Chairman Brian Brooks, Chairman Steven Mnuchin, Chief Executive Joseph Otting and Vice Chairman David Fawer in July 2011.
The FDIC hadn’t begun the bidding process for First Federal, but Mr. Mnuchin talked to someone he knew at the agency about his interest in the thrift. Around the same time, an FDIC official called the OTS and said OneWest wanted to bid for First Federal, according to people familiar with the matter.
It was common for bankers to express interest in buying troubled institutions during the financial crisis, but Mr. Mnuchin was particularly persistent, regulators say.
While officials at the OTS thought First Federal should get more time, the FDIC ran the sale process and had the larger goal of protecting the deposit-insurance fund. The financial crisis already had caused the steepest losses in decades.
Both agencies eventually agreed to close First Federal, partly because they were losing confidence that it could raise the additional capital.
OneWest put together a bid package within hours. Five other banks and private-equity firms also were interested because First Federal was in better shape than many other failing lenders. People’s United Bank, a unit of People’s United Financial Inc., based in Bridgeport, Conn., made what it thought was a winning bid, say people familiar with the offer.
Mr. Mnuchin topped People’s United by $700 million, offering $400 million more than the amount of assets First Federal had at the time. It was one of only about a half-dozen deals during the crisis when a bidder offered to pay a premium.
On Dec. 16, 2009, Mr. Mnuchin and about 30 OneWest executives sat down with FDIC officials in Orange County, Calif. The FDIC said if First Federal was shut down later that week, the plan was to hand it to OneWest as the winning bidder.
At First Federal, executives suddenly were having trouble contacting any of their regulators and were worried.
On the morning of Friday, Dec. 18, OneWest executives were dispatched in groups to wait for instructions. One team waited near First Federal’s headquarters.
A separate group of about 50 executives gathered at a strip mall in Marina del Rey and decided to split up because they didn’t want to risk being noticed by First Federal employees. Some of the OneWest employees went to a restaurant and others to a coffee shop.
At about 3 p.m., one of the executives at the strip mall received a call from OneWest headquarters. OneWest had officially won the bid for First Federal.
“First Federal was our No. 1 strategic target,” Mr. Mnuchin told The Wall Street Journal at the time.
The FDIC estimated that First Federal’s failure would cost the deposit-insurance fund $146.3 million. The actual losses turned out to be zero.
—Lisa Schwartz contributed to this article.
