The Man Behind The Mess At First CapitalKathleen Kerwin
The swift decline of California insurer First Capital Holdings Corp. to the brink of bankruptcy has created a throng of losers. Stockholders, notably Shearson Lehman Brothers Inc., which owned a 28% stake and has taken a $144 million pretax writeoff, face a total wipeout. Bondholders and lenders, notably Citibank, on the line for much of a $275 million loan, may not do much better. Policyholders, say regulators, are likely to recoup most if not all of their money but may have to wait awhile.
Remarkably, one person escaped with little financial damage--Robert I. Weingarten, the very man who founded the company and then loaded it up with
the junk bonds that ultimately brought it down. He and his family sold their 9.5% stake in First Capital to Shearson in November, 1988, for $37 million. Weingarten also resigned as chairman on Mar. 15, just before the crackdown by insurance regulators, who recently seized the company's life insurance units. "He was unbelievably lucky," says one company insider. "It was like he was forced out of a building before an earthquake hit."
Weingarten's timely escape shouldn't surprise anyone who has followed his roller-coaster career. The Brooklyn-born entrepreneur, age 49, always dreamed of hitting the big time. He built First Capital from scratch into an entity with $9.7 billion in assets. Yet his companies often were starved for cash and eventually wound up sold or liquidated. There is no evidence of illicit dealings, but Weingarten himself apparently received enough to live high on the hog. And while his investors sometimes took a beating, he usually came out whole.
This time, however, "I don't feel unscathed," Weingarten says. He is upset about the harm to employees and customers, he says, but "it's not like I saw a cliff coming and turned away. Why is it a crime in America to build a company, sell your stock, and come out ahead?"
His first major venture was Macro Communications Inc. in 1971, which among other things bought Financial World magazine, The Saturday Review, and View, a cable-TV magazine. Weingarten also had a duplex apartment just off Fifth Avenue, a beach house in Southampton, N. Y., and a chauffeured Cadillac. He rubbed elbows with wheeler-dealers such as Saul Steinberg, Rupert Murdoch, and Carl Lindner.
Macro, though, was soon awash in red ink. Its biggest money-loser was The Saturday Review, which Weingarten finally closed in 1982. (BUSINESS WEEK Editor-in-Chief Stephen B. Shepard was the Review's editor at the time.) Badly short of capital, Macro defaulted on a $750,000 bank loan collateralized by The Saturday Review and partially guaranteed by Weingarten. To repay the loan, Weingarten had to sell Financial World in 1983. He says more capital wouldn't have saved the Review.
JUNK-LOADING. In search of new horizons, Weingarten moved to Los Angeles and met Michael Milken, Drexel Burnham Lambert Inc.'s junk-bond king. With the help of junk financing from Milken, Weingarten began building a new empire with First Capital. One of his first purchases was the Pilgrim Group Inc., a mutual-fund firm. Weingarten's wife, Palomba, a former timpanist and music teacher and an experienced Wall Street money manager, ran the funds.
In 1985, Robert Weingarten plunged into insurance by acquiring Richmond (Va.)-based Fidelity Bankers Life Insurance Co. from Monarch Capital Corp. for $75 million. In 1987, he scooped up an even bigger unit, E. F. Hutton Life, based in San Diego, which he renamed First Capital Life Insurance Co. To attract more customers, Weingarten offered high yields on annuities and universal-life policies. To pay those yields, he invested a hefty chunk of the insurance companies' assets in junk bonds. Eventually, 38% of First Capital's invested assets were tied up in junk.
As First Capital grew, so did Weingarten's lifestyle. His salary reached $ 1 million a year. He polished his tennis game on the courts behind his Holmby Hills, Calif., mansion. He and Palomba raised horses in the Santa Monica
Mountains, and he became a patron of Los Angeles' opera, ballet, and symphony.
First Capital's balance sheet, though, was not quite as sumptuous. California insurance examiners are exploring whether the company used questionable maneuvers to inflate its financial statements. In particular, says one source, they are looking at reinsurance contracts held by First Capital's insurance unit. Insurers often transfer some of their risk to reinsurers to reduce their capital requirements. Under scrutiny is some $60 million of First CapitalLife reinsurance that regulators think may have inflated capital without transferring risk to the reinsurer. Disal-lowing that amount would take a huge bite out of the insurer's $107 million of net worth.
ENTER SHEARSON. Even so, First Capital's fast growth strained the company as revenues reached $726 million in 1988. Weingarten was anxious to gain an equity partner with deep pockets. And Shearson, whose brokers have sold more than $3 billion in First Capital products, wanted a say in the company. Shearson, then run by Peter Cohen, injected $80 million in equity by acquiring a 44% stake, including 3.36 million shares from the Weingartens. Shearson took over four of First Capital's six board seats, one of which later went to Cohen. As part of the deal, Palomba Weingarten later bought the highly successful Pilgrim Group for $11.5 million. Shearson declined comment on this story.
Some First Capital shareholders were infuriated because Weingarten sold his entire First Capital holding for $11 a share--an 85% premium over the market price. That deal was not offered to other shareholders. "When he sold his stock and left all the rest of us hanging, emotions were running high," says one former shareholder. Weingarten says he even got death threats, but defends the sale as the only deal Shearson would agree to. He also said stockholders got a chance to cash out at an even better price the following summer, when the stock moved above 12.
In 1989, the precipitous slump in the junk-bond market began afflicting First Capital as well as many of Drexel's other clients. By Mar. 15, 1991, to reflect a wave of recent junk-bond defaults that hit its portfolio, the company restated earnings for the fourth quarter, from a profit of $10.2 million to a loss of $24.7 million.
But the embarrassing restatement triggered the final confrontation in the long, tense relationship between Weingarten and Shearson. "It wasn't an easy relationship," says one insider. "There were constant difficulties about the direction of the company." Other sources say Shearson had been looking for a pretext to force Weingarten out. At one meeting, when Weingarten threatened to leave, as he had several times in the past, Shearson representatives quickly accepted the resignation. Shearson declined to comment on the episode.
It has been downhill for First Capital ever since. On May 10, California and Virginia regulators started taking over First Capital's insurance operations.Citicorp moved late the same day to push the holding company into involuntary bankruptcy. To protect the California insurer from bankruptcy claims, State Insurance Commissioner John Garamendi put it into conservatorship on May 14.
As for Weingarten, he told BUSINESS WEEK that he plans to spend his newfound leisure time riding horseback in Malibu, taking violin lessons, and dabbling in investments. He is also auditing classes in constitutional law at the University of California at Los Angeles. With his big windfall from Shearson, that may be enough.
HOW WEINGARTEN CAME OUT UNSCATHED WHILE SHEARSON TOOK THE HIT
NOVEMBER, 1988 Robert Weingarten and his family sell Shearson Lehman Brothers their 3.36 million shares of First Capital Holdings for $37 million, an 85% premium over the market price. Weingarten remains CEO with a $1 million annual salary
MAY, 1989 Weingarten's wife Palomba buys Pilgrim Group, FCH's plum asset, for $11.5 million
MAR. 15, 1991 FCH announces junk-bond losses that slashed 1990 profits. Weingarten resigns as chairman but retains $500,000-a-year consulting post
MAY 10, 1991 California's insurance department orders FCH's life insurance unit to halt the surrender of policies. Shearson to write off $144 million in its now worthless FCH position
MAY 13, 1991 Virginia regulators seize Fidelity Bankers Insurance. Citicorp and other FCH creditors file to force the company into bankruptcy
MAY 14, 1991 California seizes the life insurance unit
DATA: FIRST CAPITAL HOLDINGS CORP., BW
Kathleen Kerwin in Los Angeles