Credit Suisse's Cash-Out Mortgages
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TAMARACK LOAN: $250 MILLION DEFAULTED ‘It looked like a dream,’ the developer says. Skiing, Golf and Bankruptcy Credit Suisse’s real estate bankers made $3.4 billion in loans to eight high-end projects from 2005 to ’07. All are in bankruptcy or default. By ANTHONY EFFINGER and DANIEL Taub Photograph by GLENN OAKLEY o jean-pierre boespflug, French-born developer of a ski resort in the Idaho outback, the $250 million Tloan from Credit Suisse Group AG was too good to pass up. Dealmakers from the Swiss bank’s Los Angeles office arrived to pitch Boespflug on the unorthodox loan in 2006, just when his Tamarack Resort was lining up financing for its base village beneath newly cut ski trails. Unlike regular construction loans, which doled out enough money to complete one project at a time, this one would let him build several clusters of homes and condominiums at the resort 79 APRIL 2009 BLOOMBERG MARKETS simultaneously. The loan would cover subprime residential mortgages: bundled In its quest to loan money to the ski and just a portion of the development cost. securities that are divided into tranches, golf resort operators, the bank was unusu- The idea was that proceeds from selling each of which has a different credit rating ally aggressive. “Usually, bankers don’t units in one building would be used to and interest rate. Both paid interest that come to you; you go to them,” says Boes- finish the next, and so on. As long as the often exceeded that of conventional pflug, a former executive at computer homes and condos sold, Boespflug would bonds. Both were popular when real networking company Cisco Systems Inc. be fine. “It was like putting candy in front estate was hot, and both are hurting who taught skiing at Lake Tahoe on week- of a 4-year-old,” Boespflug, 54, says. “It now as the loans inside them go bad. ends when he worked at technology com- looked like a dream.” Many banks matched borrowers with panies in the San Francisco Bay Area. Boespflug signed the documents in May eager investors during the real estate boom. “They came to us with a very fancy Power- 2006. Credit Suisse collected its fee and Credit Suisse, Switzerland’s second-largest Point presentation.” sold the loan to a syndicate of investors it bank, was unusual in that it made big had lined up. Mutual funds run by Morgan loans—$250 million–$675 million each— he list of Cred- Stanley’s Van Kampen Funds Inc. unit and because it almost cornered the market it Suisse loan bought the loan when it was made, or on syndicated loans to posh developments clients is synon- shortly after, according to regulatory fil- such as Tamarack, says Joseph Snider, ymous with lux- ings. Then the real estate market went senior credit officer at Moody’s Investors ury: $375 south, and sales at Tamarack slowed. In Service, which rated the projects for a fee million went to December 2007, just 19 months after tak- so that Credit Suisse could sell the debt. the Yellowstone ing the Credit Suisse loan, Boespflug Many of the loans, which earned the Club, a private missed a $5 million payment. bank millions of dollars in fees, were made Tski and golf resort in Montana; $540 mil- Tamarack is one of at least eight high- out of Credit Suisse’s Los Angeles office lion to Lake Las Vegas resort, a 3,592- end projects in the U.S. West, Florida and and were then sold to investors by a group acre (1,454-hectare) golf community in the Caribbean financed by Zurich-based of Credit Suisse bankers in New York. The Nevada; $275 million to Promontory, a Credit Suisse that are either in default or Swiss bank has had extensive operations high-end ski enclave in Utah; $400 mil- in bankruptcy. Those failures reverberate in the U.S. ever since it acquired a majority lion to Turtle Bay Resort, a beach devel- in the financial system because Credit stake in New York–based investment opment in Hawaii; and $675 million to Suisse sold the loans to investors who, in bank First Boston in 1990. It then bought Ginn Resorts in Celebration, Florida. turn, put them into mutual funds or pack- investment bank Donaldson Lufkin & Credit Suisse made $7.74 million in fees aged them into securities called collater- Jenrette Inc. for $13.4 billion in 2000. from the Yellowstone loan alone, accord- alized-loan obligations. In February, Credit Suisse reported ing to court documents. CLOs are similar to the collateralized- a record loss for 2008 of 8.2 billion Swiss Credit Suisse bankers in New York then debt obligations that banks crafted out of francs ($7 billion), in part because of took over and sold the loans to syndicates its exposure to toxic U.S. real estate– of investors at mutual funds, insurance related debt. companies and hedge funds. Babson Capi- GINN CLUBS AND tal Management LLC, a Boston company RESORTS that manages $108 billion, and affiliates LOAN: $675 MILLION owned $40 million of the Yellowstone BANKRUPT loan at one point, according to a list of owners obtained by Bloomberg News. Ginn had already gone The Bill & Melinda Gates Foundation held bankrupt once. $1.8 million, according to the list. The Microsoft Corp. founder and his wife are members of the Yellowstone Club. “It was a potent machine that they had,” Snider says. “And it worked for a while.” Most of the projects got going in the late 1990s and early 2000s, when real estate prices soared, prompting developers to build extravagant resorts. The Yellowstone Club installed ski lifts to serve small clus- ters of homes, at great expense. When Yellowstone declared bankruptcy in December, it listed among its assets a trove BRIAN SMITH 80 BLOOMBERG MARKETS APRIL 2009 LAKE LAS VEGAS LOAN: $540 MILLION BANKRUPT Until late 2005, the point man on was Arik Prawer, who is now a Credit many of the loans was Jeff Barcy, now 39, Suisse managing director. “These were The resort refinanced and who has both a bachelor’s degree and a young technocrats,” Boes pflug says. then failed a year later. Master of Business Administration from “The bosses were not there. They were Harvard University. He’s listed as the not at the table.” of pricey furniture and baubles, including first investment banking contact in the Prawer didn’t return phone calls and two winged griffins, sculpted from marble, “pitch book” sent to potential investors e-mails seeking comment. Credit Suisse that Yellowstone bought for $19,250. in the Yellowstone Club loan. spokesman Duncan King says Prawer Some of the developments were in Barcy appears to have been well paid and others who worked on the loans remote locations and thus were likely to for his work. He left Credit Suisse in late declined to comment. attract only the most adventurous condo 2005 to become chief executive officer of Boespflug says Prawer and his col- buyers. Tamarack is 100 miles (160 kilo- Hearthstone Inc., a real estate invest- leagues solved a persistent problem in meters) north of Boise, up a two-lane ment firm in San Rafael, near San Fran- the development business: having to road, and has no commercial air service. cisco. When he moved north, he bought a start the borrowing process all over each Even so, Credit Suisse had no trouble house in nearby Tiburon for $3.3 million, time you want to erect another building. finding buyers for the loans. The Tama- according to property records. The hitch in the Credit Suisse loan was rack and Yellowstone loans were fully Barcy listed the projects he financed at that it didn’t include enough money to subscribed, meaning that Credit Suisse Credit Suisse on a biography that appears finish the project, forcing the borrower found investors for all of the debt. on Hearthstone’s Web site: the Yellow- to pay for much of the development with Credit Suisse’s Los Angeles office is stone Club, Lake Las Vegas, Promontory proceeds from unit sales. If sales slowed, located in Fox Plaza, a 34-story tower and Turtle Bay Resort. Barcy, who left which seemed a remote possibility in recognizable to film buffs around the Hearthstone in October 2007, didn’t answer 2006, Tamarack wouldn’t have the world as Nakatomi Plaza, the fictional e-mails or return phone calls to his home. money it needed to finish the buildings. high-rise taken over by terrorists in the Boespflug says the Credit Suisse lead The other hitch was that because of JACOB KEPLER JACOB 1988 Bruce Willis movie Die Hard. banker when he took his Tamarack loan the revolving feature of the loans, they 81 APRIL 2009 BLOOMBERG MARKETS TURTLE BAY LOAN: $400 MILLION freeze up in mid-2007. Lake Las Vegas Credit Suisse allowed the developers to DEFAULTED borrowed $540 million in June 2007 to give themselves millions of dollars as dis- The Hawaiian resort was refinance an earlier, $570 million Credit tributions or loans, according to Snider developed by Oaktree Capital. Suisse loan and went bankrupt in July at Moody’s. Some of those distributions 2008. The Yellowstone Club borrowed went to people with spotty credit histo- $375 million in September 2005 and ries. Tim Blixseth and his wife, Edra, required a huge pile of difficult-to-com- declared bankruptcy in November 2008. the founders of the Yellowstone Club, prehend spreadsheets and terms. “They Promontory took $275 million from declared bankruptcy in Oregon in 1986 had the best of intentions, but they creat- Credit Suisse lenders in 2005 and was when Tim’s timber business faltered.