Three Deals Negotiated by the RTC Draw Controversy, Political Attacks
The Resolution Trust Corp.'s property sales program may find itself mired in election-year politics.
Democrats are increasingly pointing to bureaucratic foul-ups, alleged cronyism, and political manipulation in deals made by an agency that is the centerpiece of President Bush's first major financial initiative.
GOP Rejects Complaints
"The agency that was created to clean up the mess is a part of the mess," Sen. Kent Conrad, DN.D., said in a Senate debate last month over new funding for the thrift bailout.
Republicans dismiss the criticism of the agency as political posturing. They say second-guessing and political micro-management of the agency's business will only increase the cost to taxpayers.
Nevertheless, the huge cost of the bailout makes the RTC an inviting target to Democrats, and so far attention has centered on three controversial deals:
* The sale of loans and real estate to Maxxam Inc.
* The sale of Miami's CenTrust Tower to Winthrop Financial Associates.
* The proposed sale of a nationwide real estate portfolio to Patriot American Investors.
Together, the three transactions are worth roughly $675 million. But the questions surrounding them could intensify Congressional scrutiny and bog down efforts to sell $18 billion of empty office buildings, vacant land, remote hotels, and other depressed real estate now languishing in the RTC's portfolio.
Here is an in-depth look at the three deals.
Early in 1991, RTC officials "almost came to blows" during an internal dispute, according to one eyewitness. Officials were taking sides on a plan to sell a $180 million portfolio of loans and real estate projects for $130.1 million to Maxxam Inc.
The RTC has been questioned in this case for dealing with an investor associated with an expensive thrift failure. The agency's own investigators pointed out that the Federal Deposit Insurance Corp. was looking at Maxxam and its chairman, Charles E. Hurwitz, in connection with the failure of United Savings Association of Texas, an RTC official confirmed.
Maxxam, based in Houston, was a minority shareholder, and Mr. Hurwitz, chairman, of the holding company of United Savings, which was seized by regulators in 1988.
Moreover, a $12 billion FDIC lawsuit filed in January against junk bond dealer Michael Milken alleges a scheme in which United bought $1.4 billion of junk bonds underwritten by Drexel Burnham Lambert. The alleged payoff was Mr. Milken's help in financing Mr. Hurwitz's other deals, including the purchase of Pacific Lumber Co.
That deal itself was the subject of hearings in 1987 by Rep. John Dingell's oversight and investigations subcommittee, which was looking into the leveraged buyout phenomenon.
Environmentalists and Pacific Lumber shareholders complained bitterly about Mr. Hurwitz's tactics. These included accelerated harvest of a rare redwood forest in order to meet takeover-debt obligations.
Mr. Hurwitz, through a spokesman, said he had neither owned nor controlled the thrift and that he did not take part in decisions to buy the junk bonds. But the FDIC suit, while it doesn't list Mr. Hurwitz as a defendant, claims he and the Milken group, in effect, controlled United by pooling minority stakes.
A regulatory filing in 1989 by the holding company, United Financial Group Inc., acknowledged that it expected the FDIC to make a claim of $534 million in connection with a net worth agreement signed when the company acquired a troubled thrift in 1983. But officials of the holding company said the FDIC, after making a settlement, had ceased communications. The FDIC claim remains pending.
The RTC knew of Mr. Hurwitz's "colorful past," said agency spokesman Steve Katsanos. But its records search turned up no formal fraud complaint that would have disqualified Mr. Hurwitz from buying assets.
His Money's Green, Too
The RTC, which denies there was internal dissension over the deal, ultimately was swayed by the cash offer from Mr. Hurwitz, which was about $15 million higher than the next highest bid.
"His money is as green as anyone else's," Mr. Katsanos said at the time. Last week, he added, "Here we are, several months after that deal was consummated, and I still haven't seen any charges brought" against Mr. Hurwitz.
This high-profile deal embarrassed T. Timothy Ryan Jr., director of the Office of Thrift Supervision, who was identified in a Miami newspaper as a former fraternity brother of the winning bidder. Mr. Ryan also admitted to having talked to the buyer about RTC real estate.
Two internal investigations cleared Mr. Ryan of wrongdoing. But the leak of information about Mr. Ryan by an RTC official appeared to suggest that the buyer was perceived inside the agency as having undue clout.
And last week, the same newspaper, the Miami Review, reported that the agency had closed the deal for $44 million, despite getting three higher cash bids, including one for $50 million.
House Counsel's View
OTS counsel Harris Weinstein told American Banker he had advised Mr. Ryan he needn't recuse himself should his acquaintance's bid come to a vote of the RTC board. "It's a very remote relationship, and in my view, there wasn't the slightest reason for recusal," he said.
Mr. Weinstein said 23 years had passed between the time the two last met at Villanova University and the time when Arthur J. Halleran of Winthrop Financial Associates, Boston, contacted Mr. Ryan. The contact took place after Mr. Ryan's appointment as OTS director; the director also serves on the RTC board.
Mr. Weinstein's advice was moot, the lawyer said, because no board vote was taken.
Higher Bids Came in Late
A Treasury Department review of the case found nothing amiss, added OTS spokesman Bill Fulwider.
The problem, according to Mr. Katsanos, the RTC spokesman, was that the higher bids came in after local RTC officials had agreed to proceed with Winthrop.
Two RTC asset sales officials, Lamar Kelley and Tom Horton, advised local officials during an RTC board meeting, according to Mr. Katsanos, that it was best to stick to bidding deadlines, even if it meant sometimes ignoring late bids that appear better. "That's what deadlines are for," Mr. Katsanos said.
Vento on Easy Terms
An aide to Rep. Bruce F. Vento, D-Minn., chairman of an RTC oversight subcommittee, voiced concern that the agency's 70% financing of the deal would let the buyer "cash out" his investment by simply syndicating the partnership. That could enable the group to undercut an already soft real estate market by offering low rents.
Winthrop declined to comment on whether it would syndicate the Centrust Tower deal, citing a prohibition on commenting by the Securities and Exchange Commission.
A spokeswoman for Winthrop said the group intends to lease space in the CenTrust Tower for $20 to $22 a square foot and would offer tenant improvements. Winthrop had told Miami officials it would try to rent space for about $18 a square foot.
This would have undercut the market, said Matthew Schwartz, who heads Miami's downtown development authority. But he said the merger of Southeast Bank into First Union Corp. would add to vacancies and drive rents much closer to the $18 level.
He also said he didn't think the building could command $44 million today.
Perhaps the most controversial deal to date is a huge bulk sale being negotiated with Patriot American Investors. It is seen by some as a virtual giveaway of $500 million of assets to well-connected investors.
That taxpayer-financed deal allows the buyers to negotiate terms and then select properties.
The convoluted process, being tried in hopes of moving hard-to-sell properties by pooling them with better real estate, is seen in some quarters as ripe for political abuse. RTC staff members have complained that sales of properties at a higher price were overturned to include them on the Patriot American list.
A Controversial Canadian
"You wind up going around and around on this deal," said a congressional staff member who was preparing a report on the deal for Rep. Frank Annunzio, D-Ill.
One principal, controversial Canadian takeover artist George Mann, is chairman of a thrift holding company that is in default on an $89 million loan from the National Bank of Canada.
He first made a mark in the early 1970s as owner of scandalridden United Trust, a Toronto thrift institution which he "bent" to finance real estate deals, according to "A Matter of Trust," a 1985 book by Patricia Best and Ann Shortel. A number of officials of the trust were jailed for real estate fraud, including taking bribes from a developer, the book said.
Still, Mr. Mann escaped prosecution and sold his interest in 1976 for twice book value. It was sold "because it had grown beyond its capital capacity," Patriot American noted in a written response to American Banker questions. Regulators in the United States and Canada have reviewed his transactions and approved various investments in financial companies, the written response added.
Mr. Mann has "no personal financial liability" to Lincoln Savings Bank, according to the written response. He has "a minor financial interest," and it was never contemplated that he would be involved in Patriot's management.
In any event, critics have focused on a much broader target in the group, New York real estate speculator Gerald Guterman.
After acting as consultant to the group, Mr. Guterman was tossed out, effective Oct. 31, due to RTC concerns over his role in a soured apartment conversion in New York. The property is the object of litigation over the RTC's ability to sidestep local rent-control law.
Mr. Guterman was well known for defaulting on bank and thrift loans in failed coop conversion schemes in New York, said the aide to Rep. Annunzio. He added that the dealmaker has a long history of legal problems, including one that landed him in jail in the early 1960s.
Mr. Guterman was convicted of brokering illegal draft deferrals in a scheme in which he acted as middleman between his friends and a government official, the congressional aide said.
Allegations of Payoffs
More recently, The New York Times reported, payoffs were alleged to have been made on his behalf to organized-crime figures in a tax-fraud indictment filed last year but later dismissed.
To top it off, Sen. Conrad complained during debate over the latest RTC refunding that Fred Malek, a member of President Bush's recently announced reelection team, and Frank Carlucci, another Republican political operative, would get substantial brokerage fees if the Patriot American deal is allowed to go through.
"Against power like that, concerns being expressed by [RTC] employees about this deal are simply being snuffed out," said Sen. Conrad, who was proposing legislation to protect whistleblowers.
Patriot American last week dismissed Sen. Conrad's claims as misleading political rhetoric. Both Mr. Malek and Mr. Carlucci are in the Carlisle Group, which engineered the leveraged buyout of CB Commercial. The firm will broker properties for the group, a publicist for Patriot American said, but "there is no connection" between the two politicos and the investor group.
The controversy over the newfangled deal is understandable but not justified, said Mr. Rubin, a lawyer for the group. The RTC selected Patriot American and several other real estate management experts who had responded to a request for proposals, he said.
The agency had announced it wanted to offer cash-flow financing to buyers willing to purchase hundreds of millions of dollars worth of real estate that the RTC had already failed to sell through more traditional means.
The proposals outlined terms under which investors were willing to take on the task, and the RTC selected the most favorable ones, Mr. Rubin said.
"RTC shares in the cash flow from day one, on a sliding scale depending on a formula as to the pool from 15% to 70% over the term of the proposal," Mr. Rubin said, asserting the structure - criticized as a seven-year interest-free loan - would save taxpayers money.