CIT Buys OneWest as Goldman Sachs Alumni Revive Lenders

CIT Group Inc.’s $3.4 billion purchase of OneWest Bank, orchestrated by two former Goldman Sachs Group Inc. executives, combines two casualties of the financial crisis. CIT rose the most in almost three years.

John Thain, who was president of Goldman Sachs from 1999 until 2004, will continue as chief executive officer of New York-based CIT, which said today it will acquire the firm known as IndyMac Bancorp before its 2008 collapse. CIT filed for bankruptcy in 2009 after losses on subprime mortgages led to a $2.33 billion U.S. bailout that was never repaid.

Since those failures, both CIT and OneWest, whose chairman is former Goldman Sachs executive Steven Mnuchin, emerged as profitable lenders. Thain reversed a 2012 loss of $588.6 million with a $681.6 million profit last year. OneWest, backed by billionaires John Paulson and George Soros, hired Goldman Sachs this year to find a buyer while it also prepared for a possible initial public offering.

“All of the things that needed to be fixed coming out of the bankruptcy have in fact been fixed,” Thain, 59, said in an phone interview. “We are starting to grow.”

CIT climbed 11 percent to $48.71 at 4:15 p.m. in New York, the biggest increase since August 2011. Thain bought 40,000 shares of CIT on May 15 at $41.54, 48 cents above the stock’s 52-week low, boosting his total to 443,000 shares, regulatory filings show.

FDIC Takeover

IndyMac made mortgages to people without verifying their income, which prompted the Federal Deposit Insurance Insurance Corp. to take control of the lender in 2008. IndyMac is the second-largest U.S. commercial bank failure on record, behind the collapse of Washington Mutual Inc.

Shareholders of IMB Holdco LLC, OneWest’s parent company, will receive $2 billion in cash and 31.3 million shares of CIT common stock, which is valued at $1.4 billion at a price of $44.33, CIT said today in a statement. Both boards of directors approved the transaction, which requires regulatory approval.

A hedge fund set up by Paulson made almost $1 billion on its investment in OneWest, according to a person familiar with the matter who cited a memo sent to clients. The sale values the fund’s stake at $788 million, and Paulson also received $551 million in dividends, the person said. The fund paid $400 million for the stake in 2009.

Mnuchin will become CIT’s vice chairman and join the board of the combined company, as will OneWest director Alan Frank, according to the statement.

Middle Market

“The transaction diversifies and lowers the cost of CIT’s deposits, broadens the products we can offer to our middle market clients, is accretive to earnings and return on equity,” Thain said in the statement.

CIT expects the transaction to add 20 percent to earnings per share in 2016, according to the statement. The company also said today that its board approved a stock repurchase of as much as $500 million through the first half of next year.

CIT’s takeover of OneWest is the biggest financial services industry deal announced this year, according to data compiled by Bloomberg. Since the financial crisis there has been a dearth of takeovers among large lenders, and regulators have held up transactions including M&T Bank Corp.’s merger with Hudson City Bancorp Inc., originally announced in August 2012.

“Financial institutions are much better capitalized today than they were prior to the crisis,” Thain said in the interview. “We are in a good regulatory spot in terms of how they perceive us, so there’s nothing that I can think of that would not allow this deal to get approved.”

Excess Capital

The OneWest transaction uses more than $1 billion of excess capital, including the $500 million of share buybacks, and results in a Tier 1 common ratio of 12.5 percent to 13 percent, CIT said today in a presentation. CIT’s Tier 1 common equity ratio was 16 percent at the end of the first quarter.

“They needed to unlock their excess capital -- they were way over-capitalized,” Mike Mattioli, an analyst at John Hancock Asset Management in Boston, said in an interview.

JPMorgan Chase & Co. is financial adviser to CIT, and Wachtell, Lipton, Rosen & Katz is legal counsel. Goldman Sachs, Bank of America Corp. and Cleary, Gottlieb, Steen & Hamilton LLP represent IMB Holdco. Sullivan & Cromwell is serving as joint regulatory counsel for CIT and IMB Holdco.

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