July 24 (Bloomberg) -- Guaranty Financial Group Inc., the Texas bank spun off in 2007 by a forest products company, may become the biggest lender to collapse this year, wiping out investments by billionaire Carl Icahn’s funds and Omni Hotels owner Robert Rowling.

Guaranty can’t raise capital demanded by regulators and will probably fail, according to a filing yesterday with the Securities and Exchange Commission. The Office of Thrift Supervision has taken over functions from the board, directed the bank to turn itself over to the Federal Deposit Insurance Corp. and is pursuing transactions likely to wipe out shareholders, the Austin-based company said.

A failure would be the largest among consumer lenders since September, when regulators seized the banking unit of Washington Mutual Inc. Icahn in 2007 pressed Guaranty’s owner, Austin-based Temple-Inland Inc., to spin off the thrift when values for financial firms were high, said Dan Bass, managing director of Carson Medlin Co., an investment bank focused on lenders.

“It was an accurate decision, but the timing couldn’t have been worse,” said Bass, based in Houston. Guaranty, which began trading in December 2007 at $17.50, dropped to 15 cents at 4:03 p.m. in New York Stock Exchange composite transactions.

Guaranty is the second-biggest publicly traded lender by assets in Texas. The firm had about $16 billion of assets and $9 billion in deposits, according to the company’s filings and Web site. Florida’s BankUnited Financial Corp., seized in May, had $12.8 billion of assets. The company’s filing said its “primary stockholders” refused to commit new capital.

Stakeholders

Icahn said he had taken a 9.8 percent stake in January 2008, when the stock was above $12, and called the shares undervalued. The largest stakeholder as of May, with 20 percent, was TRT Holdings Inc., a Texas investment firm controlled by Rowling, according to Bloomberg data. Rowling invested $150 million into Guaranty, the Dallas Morning News reported on Aug. 24, 2008. Shares were trading for about $4.75 at the time.

Greenlight Capital Inc., the New York investment firm owned by David Einhorn, owned 7.6 percent as of March 31, according to Bloomberg data.

Calls to Ichan and Rowling on the current size of their stakes and to regulators on status of the bank weren’t returned. Einhorn declined to comment through a spokeswoman. Stephen Raffaele, Guaranty’s chief financial officer, declined to comment. The bank’s filing said customer deposits remain insured by the FDIC.

Mortgage-Backed Securities

“We continue to work with our regulators,” spokesman John Wessman said in an e-mailed statement. The bank “can avoid any disruptions to our customers.”

Guaranty hasn’t reported official financial results since the third quarter of last year, when it recorded a $162 million loss on overdue homebuilder loans and declines in mortgage- backed securities. A March 31 filing estimated the loss for 2008 was at least $444 million.

The lender’s troubles stemmed from its purchase of mortgage-backed securities before the 2007 spinoff, seeking extra interest from seemingly safe investments, said James Gardner, chairman of Commerce Street Capital LLC, a Dallas-based investment bank.

“Guaranty kept valuing the securities at full price under the theory that it was a temporary impairment that over the long run would pay off,” Gardner said. “The FDIC has finally said ‘enough’ after keeping them alive for a long period.”

Texas Deposits

Temple-Inland entered banking during the 1980s savings and loan crisis, buying troubled institutions in Texas and California, Bass said. Potential buyers for Guaranty may be attracted by $7 billion in deposits in Texas including 30 offices in the Dallas area, 27 in Houston, 11 in Austin and 10 in San Antonio, Bass said. The bank also has about $2.3 billion in deposits in California, Bass said.

“It’s a very good footprint,” he said. “A ton of investor groups have been looking at it and trying to structure a deal, but it’s been hard to quantify the losses.”

The bank’s fate may be decided late today or on July 27, Bass said.

“Everyone is waiting for government assistance,” Bass said.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: July 24, 2009 17:23 EDT