Stephen M. Ross, the billionaire real estate developer who founded the Related Companies in New York, wants to be a banker. Somewhat surprisingly, regulators are letting it happen. The Federal Deposit Insurance Corp. has approved a proposal by Ross and fellow Related executives Jeff Blau and Bruce A. Beal Jr. to allow their new financial firm, SJB National Bank, to buy failed banks from the government and make them profitable again.
For much of the past year the FDIC had been reluctant to let private equity investors buy banks directly, even as bank failures surged. That's because private equity makes money by borrowing money, buying companies, restructuring them, and then selling them. Regulators were wary that dealmakers wanted to acquire banks only to try to flip them for quick profits. So while they allowed a few "club" deals involving several private equity firms, they didn't greenlight any big solo purchases.
The SJB executives, who have developed such Manhattan properties as the Time Warner Center, would seem to pose precisely the type of threat that regulators feared. The FDIC signed off in October because the developers have deep experience in the kinds of real estate loans on many banks' books, and agreed not to sell any banks they buy for three years. What's more, Related said it wouldn't take a direct stake in the firm, whose moniker derives from the first initial of each of the founders' names. Instead, Ross, Blau, and Beal are putting up $100 million of their own money and are collecting about $800 million from outside investors. "It won't embarrass regulators if SJB makes money," says Steven Kaplan, a professor at the University of Chicago. The FDIC declined to comment.
SOROS AND McCOLLRoss, 69, is an unlikely banking mogul. The University of Michigan graduate started his real estate business in the unglamorous realm of low-income housing. In 1990, Ross hired Blau, another Michigan alum, as an analyst to do everything from new business development to loan workouts. Blau has never left, even while earning a master's degree by commuting from New York to the University of Pennsylvania's Wharton School of Business in Philadelphia. Beal, 39, joined Related in 1995 to assess deals.
Related's dealmakers like the prospects for lending now. "There's a huge need for financing in real estate, auto, and consumer businesses," says Blau. "For anyone with sufficient access to capital, there is a tremendous opportunity." SJB is looking to buy a bank with $8 billion to $15 billion in assets.
Others are taking notice. Former Bank of America (BAC) Chief Executive Officer Hugh L. McColl Jr. and Chief Financial Officer Marc D. Oken are backing a group out to buy Florida banking assets. Some private equity players already in banking are getting more aggressive. A consortium that includes J. Christopher Flowers and George Soros bought the remains of the failed IndyMac Bancorp last year. Now they're using the bank, renamed OneWest, as a vehicle to buy other troubled banks, most recently First Federal Bank of California.
Meanwhile, the FDIC's resources are dwindling, and bank failures are at a 17-year high. If the agency can figure out how to tap more private money without raising taxpayers' ire, its job will get a lot easier. Ross and Co. "have never run a bank before, but they're operators who know real estate," says Kaplan. "That must be appealing to regulators."