Wilbur Ross, the Bank Eater
Early one October morning, Wilbur Ross sits before a dozen or so colleagues at the head of a long table in his Manhattan office, considering in his quiet way the purchase of a business worth more than a billion dollars. Ross, 74, is the chairman of WL Ross & Co., among the largest and most active firms specializing in the purchase of distressed companies; in other words, he is a vulture, albeit a well-dressed one, favoring crisp pinstripe suits and freshly shined shoes.
His investment committee is presenting the final details of the firm’s $1.2 billion bid for Northern Rock, the English bank seized by the British government in 2008 after panicked depositors withdrew their funds. WL Ross is partnering with Richard Branson’s Virgin Money.
“Who is our competition?” asks Pamela Wilson, a WL Ross managing director.
“J.C. Flowers is always our competition on everything,” says Stephen Johnson, one of the firm’s vice-presidents, referring to J. Christopher Flowers, another private equity investor. Johnson adds, “The word at the moment is that he won’t be able to bid on this.”
That leaves the field open for Ross, who describes himself as “a guy who likes to run into burning buildings” and who has been running into a lot of them lately. The committee spends much of its time talking about the need to structure the bid so it won’t embarrass the British government, which has spent an estimated $2.2 billion on the Northern Rock bailout. The firm plans to offer the Cameron administration a slice of the proceeds if it takes the bank public.
Ross himself says little, and when he does, he does so in his characteristic near- whisper. It would not be overstating it to say Ross coos. He scrutinizes a pile of documents before him. From time to time he asks a question. He wants to make sure there will be no last-minute regulatory issues. Finally, he says, “I think we are ready to vote on this.”
On Oct. 25, Virgin and WL Ross make their offer. Three weeks later, the British government accepts it and controversy soon follows. Ed Balls, the Labour Party’s shadow chancellor, assails England’s Conservative Party leaders for taking a loss on the bank. Ross arguably makes matters worse by telling British reporters that he hopes to make a substantial profit—unless, of course, Northern Rock is swamped by the European financial crisis that enabled him to buy it so cheaply in the first place. This is a familiar scenario these days. Ross stands to make a lot, if he doesn’t lose even more.
Since 2008, Ross has invested $1.8 billion in faltering banks, a major play by a high-profile player. Ross is an investor’s investor; he’s not a household name like Warren Buffett or a constant presence on the cable channels like Pimco’s Bill Gross, but he’s revered and followed in his field. “He’s charming, and he’s smart,” says Steven Kaplan, a professor of finance at the University of Chicago Booth School of Business. “And he has been brilliant and contrarian in discerning opportunities.” He is also worth an estimated $2.1 billion, according to Forbes.
His firm was one of four private equity groups that paid $900 million for the failed BankUnited, a large Florida thrift, purchasing it from the Federal Deposit Insurance Corp. in May 2009. He has taken stakes in ailing institutions such as Oregon’s Cascade Bancorp, New Jersey’s Sun Bancorp, and the union-owned Amalgamated Bank in New York, all of which required his financial aid after writing down bad real estate loans. Ross has also looked abroad for bargains—and not just in England. In July he and four other investors spent $1.6 billion to buy 35 percent of the Bank of Ireland.
In the U.S., Ross argues that the smaller banks he has bought will outperform their larger competitors, such as Bank of America, which he sees as hobbled by their size and their need to comply with new regulations aimed at the mega banks. Richard Bove, a banking industry analyst, says Ross’s thesis is shrewd: “His timing is pretty good. I would expect he is going to do well.” Indeed, Ross says he and his fellow private equity stakeholders in BankUnited recouped their entire investment when they took the bank public in January 2011.
Across the Atlantic, Ross is buying larger banks. Ross says the plan for Northern Rock is to combine the traditional bank’s 75 branches with Virgin Money’s Internet operations. It’s a good strategy, says Howard Wheeldon, a senior strategist at BGC Partners in London. However, he says, Virgin Money and WL Ross got Northern Rock at a discount because of the inherent economic risks.
Ross says he paid 36 percent of book value for his stake in the Bank of Ireland, which he considers a steal. He believes Ireland will be among the first of the European countries to recover from the euro crisis and applauds its citizens for supporting austerity without taking to the streets: “There have been no riots, no picketing, no car burnings, no nothing.”
Naturally, some question Ross’s bank-buying spree. The Irish government announced in December that the country’s gross domestic product declined 1.9 percent in last year’s third quarter compared with the one before, the worst drop since early 2009. “The figures put a dent in hopes that Ireland was starting to reap the rewards of its economic reforms and austerity measures,” says Jonathan Loynes of Capital Economics in London.
Unlike Northern Rock, Bank of Ireland still holds many of its bad loans. Chief Executive Officer Richie Boucher says the bank passed a stress test conducted by the Irish central bank in March and started selling its problem loans before other euro-zone banks. “We decided to set up our stall at the fair pretty early,” he says. “There’s a couple of guys who are only starting to build their sheds.” It’s a good line, but it’s hardly comforting if the best the Bank of Ireland CEO can say is that his institution is in a slightly better position than banks in Continental Europe.
Stephen Kinsella, a lecturer in economics at the University of Limerick, finds Ross’s acquisition of the Bank of Ireland baffling. “The bank is in deep trouble,” he says. “It’s interesting that some vulture fund would want a stake in it. This is for all intents and purposes a zombie bank.” For his part, Ross is used to doubters. In 2003, when he was buying shuttered steel mills, Businessweek asked: “Is Wilbur Ross crazy?”
“My wife still isn’t sure that question has been adequately answered,” he says.
“We have some new jewelry on display, and I don’t want you to miss it,” says John Loring, the former design director at Tiffany. “It has no equal anywhere in the world—like the people in this room.” Nearly a hundred fashionable guests are gathered on the second floor of Tiffany’s flagship store on Fifth Avenue in New York for a party celebrating New York New York, a book of portraits by former Life photographer Harry Benson. Ross’s third wife, the social columnist Hilary Geary Ross, wrote the text. Many of Benson’s subjects are present, such as KKR Chairman Henry Kravis, designer Tommy Hilfiger, writer Erica Jong, and News Corp. CEO Rupert Murdoch’s spouse, Wendi Deng, who in the book is captured lounging on a sofa in a short, translucent dress.
Ross, who is bald and slightly stooped, bears a certain resemblance to Charles Montgomery Burns, the billionaire tycoon on The Simpsons. His face seems to coalesce naturally into a look of profound skepticism. He’s actually quite sunny. Ross and his wife are fixtures on the New York social circuit, and he often celebrates powerful friends with customized doggerel that jokes about their wealth and, in some cases, their trophy wives. “It’s nice to know that he can get/the senior rate on any jet,” Ross wrote in honor of the 60th birthday of Roberto de Guardiola, an investment banker. “And then to cope with aging’s ills/how about some bright blue pills?”
“He has a great sense of humor,” says his close friend, Richard LeFrak, the New York real estate developer, who has invested in banks with Ross.
Ross stands with his elbow on a jewelry case, sipping a glass of red wine. “I thought this would be good for you to see,” he tells me. “It’s another side of me.”
Many of the revelers pay their respects. “I just read about your latest deal,” gushes a woman with whom Ross exchanges air kisses. “You are so humble. It’s rare for people in your field.” Ross looks delighted to hear it.
“The thing about Wilbur is, he keeps it all up here,” says Cary Thompson, vice-chairman of investment banking at Bank of America Merrill Lynch, pointing to his head. “You go to other buyout shops, and you’re talking to 20 different people.”
“I’m always happy to be seated next to him at a dinner party,” says author Amy Fine Collins, who covers style and fashion for Vanity Fair. “He’s a lot of fun.”
Ross disappears in the crowd and returns with interior designer Mario Buatta, “the prince of chintz,” whose clients include Barbara Walters and Mariah Carey. “I’ve done all his apartments in New York, Southampton, and Palm Beach,” Buatta says. “He’s great to work with as long as you get it done on time.” He gazes around the room at the other guests. “They’re all like that,” he sighs.
“He’s one of the best bottom feeders in the business!” says Leonard Stern, the billionaire real estate mogul.
“I only told him good things about you,” he says to Ross. “You owe me 50 bucks.”
“How ’bout 25?” says Ross.
“Forty,” says Stern.
“Thirty,” says Ross.
Ross grew up in North Bergen, N.J., the son of a municipal judge. He went to Xavier High School, a Jesuit military academy in Manhattan, where he was captain of the rifle squad. He never wore earplugs and damaged his hearing. He hoped to become a writer but found he wasn’t suited for the craft early on at Yale University. “Every single morning, you had to deposit 1,000 words of creative writing into a little mail chute,” Ross recalls. “I found that after three weeks, I was totally out of material.”
He discovered his true calling during a summer stint at a money management firm in New York. He spent hours at the public library researching companies and found that he loved it. “I’ve always been a bit of a bookworm,” he says. After earning an MBA at Harvard Business School in 1961, Ross got a job at Wood Struthers & Winthrop, another Wall Street money manager. He was given the task of salvaging the company’s troubled venture capital investments, such as its bet on a startup founded by an entrepreneur who thought he could make world-changing transistors from cellulose. (He couldn’t.) It forced Ross to learn how to deal with banks, creditors, and Chapter 11 proceedings.
These skills helped when Ross got a job at boutique investment bank Rothschild in 1976. There, he created a niche for himself as a bankruptcy adviser. When the junk bond market collapsed in the late 1980s, he helped bondholders recover their investments in Donald Trump’s Taj Mahal and T. Boone Pickens’s Mesa Petroleum. His office is full of cut-glass tombstones commemorating such deals.
Ross made enough money to underwrite an unsuccessful 1998 campaign to become governor of New York by his second wife, Betsy McCaughey. Their subsequent divorce, however, forced Ross to liquidate his collection of American Pre-Raphaelite paintings. (Ross declines to discuss any aspect of his second marriage.) The nuptial drama came at a time when Ross was becoming restless at Rothschild. It bothered him that he was making tens of millions while his clients were making hundreds of millions. In 2000 he and his entire team (including the mail clerk) departed amicably from Rothschild and formed WL Ross.
It was a good time for talented bottom feeders. The dot-com bubble burst that year and was followed by a recession. Steel companies including Bethlehem Steel filed for bankruptcy. So did textile manufacturer Burlington Industries and mine operator Horizon Natural Resources. Ross snatched them up along with some of their battered competitors. He was able to cut costs by working closely with union leaders. “He had an open mind,” Leo Gerard, international president of the United Steelworkers, says of Ross. “He recognized that workers had more to contribute than just their backs and their arms.”
Some of Ross’s investments, such as his effort to create a global textile leader, lagged. Others made him a fortune. He sold his steel holdings for $4.5 billion in 2005 to ArcelorMittal, the world’s largest steel and mining company. WL Ross’s profit: $2.5 billion. The chairman personally pocketed $300 million from the deal. That was more like it. Ross sold WL Ross to Invesco, a global investment manager, for $375 million the following year.
Ross assiduously promotes his successes and had little trouble raising $4 billion in 2008 to invest in banks on the heels of the financial crisis. In May 2009, WL Ross, Blackstone Group, Carlyle Group, and Centerbridge Partners bought BankUnited from the FDIC. It was predicted at the time that BankUnited’s failure would cost the agency $4.9 billion. As part of the deal, the FDIC assumed up to 80 percent of BankUnited’s copious losses.
The U.S. was still mired in a recession. The country had spent billions of dollars bailing out the banking system and now private equity speculators such as Ross were scooping up banks, apparently taking advantage of the FDIC’s safeguards. On Oct. 22, Democratic Senator Jack Reed of Rhode Island wrote to Treasury Secretary Timothy Geithner and former FDIC Chairman Sheila Bair, urging them to put curbs on such acquisitions. The FDIC issued rules requiring buyout firms investing in banks to hold them for three years and maintain profit-crimping amounts of capital.
So Ross changed his strategy. He funneled money into troubled banks that needed cash but hadn’t yet fallen into the FDIC’s hands, such as Oregon’s Cascade and New Jersey’s Sun Bancorp. “Their stocks were trading at very, very big discounts from book value,” Ross says. “We felt that provided enough cover we’d be O.K. if they had more losses.”
He also began to indirectly invest in banks that had been seized by the FDIC. In April 2010, WL Ross became the largest investor in First Michigan Bank in Troy. It was a tiny institution with only 30 employees. But First Michigan CEO David Provost had grand ambitions. Banks were failing left and right in Michigan. He wanted to buy them from the FDIC. Provost says Ross understood his strategy immediately and invested $100 million of his firm’s money in First Michigan.
On the day First Michigan announced Ross’s cash infusion, it bought CF Bancorp, a bank in Port Huron, Mich., with 368 employees and $1.3 billion in assets. Its collapse had been the largest in the state. First Michigan, now known as Talmer Bank and Trust, has since bought three more failed banks. Provost aims to create a network of community banks that profit from problems in their larger rivals. It seems to be working. Talmer earned more than $40 million last year. “The Bank of Americas get picketed,” Provost says. “The customers close out their accounts. Then they come over and see us.”
In November, Ross crossed the Atlantic to check on his new investment in the Bank of Ireland. When it was time to leave, CEO Boucher offered Ross a ride to the airport. On the way, they made an unannounced visit to a Bank of Ireland branch in a Dublin suburb. Ross spent nearly an hour at the bank, wandering around and asking questions. “It went down extremely well,” says Boucher. “There was a lot of positive buzz among the employees afterwards.”
For his part, Ross can’t understand why anybody at the Bank of Ireland would be surprised by his interest. “We just put a big chunk of money into it,” he says. “It was kind of under the control of the government. I guess the employees weren’t used to the Prime Minister dropping by.”
There is one banking investment of which Ross is particularly proud. In September his firm pledged $50 million to Amalgamated Bank, which is controlled by unions representing hotel and garment industry workers and has become known as the financial institution guarding the deposits of Occupy Wall Street. On Dec. 8, Ross visits the bank’s art deco headquarters in New York to meet with Edward Grebow, its president. Sitting around a coffee table, the two explain how Ross, a loyal member of the 1 percent, came to be interested in the self-styled bank of the other 99 percent. “Well, the bank, like lots of others, made some bad real estate loans,” Grebow says. “That left us of short of capital.”
He knew there were private equity investors interested in banks. There weren’t many, though, who would put their cash into a bank that is not only union-owned but also has a unionized staff. He could think of only two. One was obvious: Ron Burkle, managing partner of Yucaipa and a major Democratic Party contributor. The other was Ross. Grebow knew Ross had good relationships with labor leaders representing steel and textile workers. “We never had a strike at any of our facilities,” says Ross. “For us, there is nothing strange about having breakfast with a labor leader. We do it all the time.” Together, they agreed to put $100 million in the bank. The deal is awaiting regulatory approval, but Grebow is already talking about using the new funds to create progressive products, such as prepaid credit cards for customers with “uncertain” immigration status and mortgages for city sanitation workers.
Then there are the benefits of being associated with the Occupy Wall Street protests that began in September. Grebow produces a chart showing that 131 new depositors signed up online in October, up from 13 the previous month. The influx of new customers was roughly the same in November. “That’s with no marketing,” he says. Ross listens, quiet as ever. He says he has no problem with Amalgamated Bank’s connection to Occupy Wall Street. It’s clearly good for the bank’s bottom line and therefore his investment. “The bank by its nature is a so-called progressive, liberal bank,” Ross says. “Ed Grebow even marched in one of its demonstrations.”
You won’t see the 74-year-old billionaire accompanying him anytime soon, however. Says Ross, “I myself wouldn’t have anything to do with Occupy Wall Street.” Nevertheless, he’s thinking about putting more money into Amalgamated Bank. Ross may not cotton to protesters who want to share his wealth, but his investments are strictly nonpartisan.