A Hundred Horses Are Ford’s Pride After Flipping Tainted Banks

Photographer: Danielle Levitt Bloomberg via Bloomberg Markets

Buyout specialist Gerald Ford raises thoroughbreds on this 1,000-acre farm in Kentucky, May, 2012. Close

Buyout specialist Gerald Ford raises thoroughbreds on this 1,000-acre farm in Kentucky, May, 2012.

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Photographer: Danielle Levitt Bloomberg via Bloomberg Markets

Buyout specialist Gerald Ford raises thoroughbreds on this 1,000-acre farm in Kentucky, May, 2012.

Gerald J. Ford has something he wants to show off. He jumps into a golf cart and races toward one of the 11 barns on his lush, 1,000-acre Kentucky thoroughbred farm. He speeds past tall sycamore trees, painted lawn jockeys and manicured fields of grass glistening from the May morning dew.

Ford stables more than 100 horses here, including broodmares he breeds with his prized Pleasantly Perfect, winner of the $6 million Dubai World Cup in 2004, Bloomberg Markets reports in its September issue.

“We’re going to see the babies,” says Ford, wearing a cap, khakis and hiking boots as he walks into the foaling barn.

Inside, Pleasantly Perfect’s latest offspring -- a 120- pound chestnut foal born the night before -- quivers next to its mother. “I love being out here,” says Ford, whose slight drawl reveals his roots in a small rural town in the Texas Panhandle.

Ford, 68, will likely sell the foal, much as he did the banks and savings and loans that he flipped to make himself a billionaire. These days, he spends most of his time in Dallas at his primary operating company, Diamond A Ford Corp., which he named after the cattle brand from his New Mexico ranch.

Four years after the worst financial crisis in decades claimed Bear Stearns Cos. and Lehman Brothers Holdings Inc., Ford is nowhere near done buying and consolidating healthy and distressed banks. While the largest U.S. firms repaid their bailouts to the $700 billion Troubled Asset Relief Program, more than 400 smaller ones are struggling to do so because they can’t raise new capital, according to an April report by Christy Romero, TARP’s special inspector general.

Hugely Profitable

“There are 7,000 banks out there, and a big number of them still have outstanding TARP preferred stock,” says Ford, who’s not related to either the late U.S. president or the auto clan. “Somewhere in there is another opportunity to recapitalize a bank. We’ve bought banks for 37 years. Except from 2002 to 2010, we never went three years without buying a bank.”

The buyout business has been hugely profitable for Ford. In March, he sold Pacific Capital Bancorp, parent of Santa Barbara Bank & Trust, to Japanese-controlled UnionBanCal Corp. for $1.5 billion, three times his initial investment of $500 million.

In August 2010, Ford took over Pacific Capital, which was made up of five separate banks with a combined $5.8 billion in assets. Pacific Capital hadn’t posted a profit since the beginning of 2008 because of soured residential construction loans. It owed $181 million to TARP.

Walking Wounded

In following their cost-cutting playbook, Ford’s team took out $177 million in expenses by merging the back-office operations of the five banks, firing 181 employees and closing five branches. It also wrote down $485 million in bad loans.

“When a bank gets in trouble, it’s just swimming against the current,” says Carl Webb, Ford’s second in command at Diamond A Ford. “We call them the walking wounded. That’s where we see the opportunity going forward.”

By sticking to this formula, Ford, the son of an auto body shop owner, has amassed about $1.3 billion, according to data compiled by Bloomberg. He has put his money into five properties: a home in the exclusive Dallas enclave of University Park; a beachfront getaway in Southampton, New York; an Upper East Side town house in Manhattan; the ranch in New Mexico; and the Kentucky horse farm.

Along with thoroughbreds, he has also bought historic saddles, including one given in 1864 to Archduke Ferdinand Maximilian Joseph of Austria by Mexico, where he briefly served as emperor. Ford paid $230,000 for it.

Quiet Operator

During the past decade, as private-equity rock stars such as Henry Kravis and Stephen Schwarzman made megadeals for brand names, Ford avoided splashy buyouts. He has operated quietly, mostly in dusty backwaters such as Levelland, Texas, and Carrizozo, New Mexico.

Since 1975, he has snapped up almost 60 small firms, using his own money, capital from partners and a $500 million private- equity fund.

Ford, a hands-on dealmaker, and Webb, 62, who manages operations, do these buyouts with the support of only 12 employees at their headquarters in Dallas. They have at times been backed by large federal subsidies, which has stirred protests from lawmakers.

“Carl is the stingiest son of a gun you would ever meet,” says Thomas Brown, whose New York-based Second Curve Capital LLC hedge fund has invested in Ford’s banking deals. “They operate a low-cost model.”

Low Key

Southern Methodist University President R. Gerald Turner encountered Ford’s low-key style when he made a $20 million donation for a new football stadium. Turner says he had to convince Ford, an SMU alum, to allow the school to name the 32,000-seat stadium after him.

“It took a while,” Turner says. “He’s a modest guy. I said, ‘Jerry, it has to have a name, and yours is by far the largest gift.’”

Ford endeavors to make money -- even small amounts -- in almost everything he does. As much as he loves his foals in Kentucky, he auctions many of them for up to several hundred thousand dollars apiece.

Another of Ford’s favorite escapes is his 147,000-acre (60,000-hectare) ranch, where he raises a herd of 3,500 cattle for market and also sells hunting trips. A three-day excursion for trophy elk goes for $9,000, and a mule deer hunt costs $3,300.

188-Foot Yacht

Ford also enjoys a 188-foot (57-meter) yacht that he co- owned with billionaire Ronald Perelman before buying out his friend’s share. “He got the greatest bargain of all time from me,” Perelman says. When Ford isn’t yachting, he leases the boat for as much as $420,000 a week.

Ford says that working in an auto body shop as a teenager alongside his dad in Pampa, Texas, spurred him to seek a better career. In high school, he carried around Ayn Rand’s libertarian tome “Atlas Shrugged,” about the pursuit of individual achievement.

“Her books talked about people being successful, and I identified with that,” Ford says. He earned an undergraduate economics degree at SMU and then got his law degree from the school in 1969, because, he says, he saw that the prosperous people wearing ties in his small town were lawyers.

“Jerry always had an ambition to do something bigger and better than what he saw in his hometown,” SMU’s Turner says. “Dallas is full of people like that.”

Shopping Spree

After working as a general counsel for a group of closely held corporations, Ford decided he wanted to be his own boss and build his own company. So, at age 31, with two partners and some borrowed money, he paid $1.2 million for 64 percent of First National Bank of Post, Texas, in 1975.

“I wanted to run something, a business,” Ford says. “After we got it, one was good, two were better.”

Seven years later, Ford bought First National Bank in Lubbock, Texas, and hired Webb to be president. The two men then went on a three-decade shopping spree. They have taken a conservative approach to buying troubled banks, scrutinizing customer loyalty and defaults to limit their risk.

They avoid firms that have lost more than 10 to 15 percent of deposits. Ford and Webb also shun buyouts if they expect defaults to rise to the point that they significantly eat into potential returns. “Banks get in trouble for one reason: They make bad loans,” Webb says.

By the mid-1980s, Ford and Webb had built up equity of $225 million on 23 small-town banks with a combined $4 billion in assets. They rolled them into First United Bank Group Inc. and sold it in 1994 to Norwest Corp. for stock valued at $495 million.

S&L Crisis

The S&L crisis in the late 1980s, brought on by the deregulation of the industry, provided Ford with the opportunity to create one of his biggest and most controversial deals. Ford and Perelman took full advantage of a U.S. government rescue program that offered subsidies and tax breaks to entice investors to take over failing thrifts.

With Perelman’s financing, they paid $315 million in 1988 for a group of five troubled S&Ls with combined assets of $11.4 billion. In exchange for their taking on the risk of the renamed First Gibraltar Bank, the government provided them with up to $9.5 billion in guarantees to cover bad loans and up to $1.8 billion in tax benefits that Perelman was able to use to shelter profits in his other businesses, according to congressional estimates at the time.

Republican and Democratic congressmen protested that regulators were giving Ford and Perelman too generous a deal.

Plain Incompetent

“I would almost be happier if there was a criminal conspiracy, but it appears that the government officials involved were just plain incompetent,” Matthew Rinaldo, the late New Jersey Republican representative, said before Congress in 1990.

Perelman, 69, says he and Ford were both shook up by the criticism. “Here we thought we were doing exactly what the government wanted investors to do, and we raised our hand as the high bidder,” Perelman says. “All of a sudden, we found ourselves in a real strong negative backlash.”

After Webb merged back-office operations to make First Gibraltar profitable, Ford sold it piecemeal in 1992 to Bank of America Corp. and other buyers for a gain of $900 million.

Ford and Perelman struck again in the mid-1990s, this time scooping up S&Ls wounded by the bursting of California’s housing bubble. They paid $1.1 billion for First Nationwide Bank and then sold off everything except the S&L’s 45 California branches.

Citigroup Purchase

The bank spent $250 million in 1995 to acquire thrift SFFed Corp., which had $4.1 billion in assets, in San Francisco. Three years later, First Nationwide received the equivalent of $1.46 billion in stock of Golden State Bancorp Inc. of San Francisco for the bank.

Ford and Perelman assumed management of the combined company, which became the nation’s then-second-largest S&L. They flipped it to Citigroup Inc. (C) in 2002 for $5.8 billion, giving Ford more than 20 million Citi shares valued at about $1 billion by the time he sold the stock.

Perelman, who got wealthy amassing stakes in Panavision Inc. and Revlon Inc. (REV), says he and Ford had the perfect relationship. “Everything was always transparent, always straight with Jerry,” Perelman says. “He will always take advantage of opportunities and turn them into real value.”

Ford stumbled during the credit bubble in the mid-2000s, when a lack of reasonably priced deals scared him away from banks and into other industries. In 2004, a real estate firm he controlled paid $89.3 million in cash and stock for the since- renamed First Acceptance Corp. (FAC), which operates a chain of 378 storefronts that sell nonstandard auto insurance.

Lousy Deal

The company has lost money on lower premiums for all but three years in which Ford has controlled it and bled $8.2 million in the first quarter of 2012. After hitting a high of $13.40 under Ford’s stewardship in 2006, the shares plunged almost 91 percent as of July 3.

“It is a lousy deal,” Ford says.

Ford returned to banking deals after the subprime crisis pushed the economy into a recession in late 2007. Since then, he has bought two banks. In one deal, he agreed to spend almost $515 million in May for Dallas-based PlainsCapital Corp. after the bank canceled a public offering.

Ford is also raising $700 million for his second buyout fund after investing his entire first one in his 2010 purchase of Pacific Capital Bancorp. (PCBC)

Eighth Decade

“There’s probably still a number of opportunities on the smaller side of things, talking sub-$500 million,” says Brad Milsaps, an Atlanta-based banking analyst and managing director with Sandler O’Neill & Partners LP.

Now approaching his eighth decade, Ford isn’t slowing down. He has four grown children from his first marriage and two more, ages 5 and 8, with his second wife. Two years ago, he made a move toward succession, installing his son Jeremy Ford as the head of Hilltop Holdings Inc. (HTH), a small insurance and financial services company that he controls.

“Work is intellectual to him at this point,” Jeremy, 37, says during a visit to the Kentucky farm with his dad and extended family. “It’s so a part of who he is that I don’t think he’ll ever not want to do it.”

At the horse farm, one of Ford’s five grandchildren bounds up to tell him about petting two recently arrived miniature donkeys, now grazing in the distance. After 37 years in the buyout business that have provided Ford with magnificent homes in four states and a Gulfstream jet to shuttle between them and his businesses, he says he has no plans to retire.

“I have been paid handsomely for a job I love,” he says.

To contact the reporter on this story: Seth Lubove in Los Angeles at slubove@bloomberg.net

To contact the editor responsible for this story: Laura Colby in New York at lcolby@bloomberg.net

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