UPDATE 2-Private equity group buying IndyMac assets

Fri Jan 2, 2009 6:33pm EST

(Recasts; adds Mnuchin, FDIC, Talbott comments, details of deal)

By Karey Wutkowski and Megan Davies

WASHINGTON/NEW YORK Jan 2 (Reuters) - The assets of failed U.S. mortgage lender IndyMac are being bought by a group of private equity and hedge fund firms, including Dune Capital Management and J.C. Flowers & Co, which are putting up $1.3 billion in cash.

The Federal Deposit Insurance Corp, which has run IndyMac since its failure on July 11, valued the sale to the IMB HoldCo consortium at $13.9 billion.

Neither the investors nor the agency would provide immediate details on financing the rest of the deal, which the FDIC expects to close in late January or early February.

The investor group is led by Steve Mnuchin, the chairman of Dune Capital and a former Goldman Sachs executive; buyout artist Christopher Flowers, and hedge fund operator John Paulson, who gained billions of dollars betting that U.S. housing prices would slide and take mortgage-backed securities down with them.

Affiliates of billionaire investor George Soros and Michael Dell, the chief executive of computer maker Dell Inc DELL.O, are also involved with the consortium buying IndyMac.

"We have assembled a group of experienced private investors in financial services to acquire the former IndyMac and operate it under new management with extensive banking experience," Mnuchin said in a statement on Friday.

The purchase will include IndyMac's 33 branches, mostly in the Los Angeles area, with about $6.5 billion in deposits, as well as loan and securities portfolios of about $23 billion. IMB HoldCo is also buying a mortgage servicing portfolio with unpaid principal balances of more than $175 billion.

Terry Laughlin, who previously headed Merrill Lynch Bank & Trust, will serve as chief executive of IndyMac.

"The current economic climate is challenging for selling assets, but this agreement achieves the goals that were set out by the chairman and board when the FDIC was named conservator of IndyMac in July," FDIC Deputy Director James Wigand said in a statement.

IndyMac had had $32 billion in assets when it was seized in July. At the time it was the third-largest U.S. bank failure until Washington Mutual's closure in September set a new record, with about $307 billion of assets. In all, 25 U.S. banks failed in 2008.

IndyMac was the second-ranked publicly traded independent mortgage lender after Countrywide Financial Corp, which was acquired last year by Bank of America Corp (BAC.N).

Founded in 1985 by Angelo Mozilo and David Loeb, who also founded Countrywide, IndyMac once specialized in "Alt-A" home loans, which often didn't require borrowers to fully document income. It collapsed after loan defaults mounted, and tight capital markets caused losses on mortgages it could not sell.

SHARING THE LOSS

As part of the deal, the FDIC entered into a loss-sharing agreement with IMB HoldCo. IndyMac will assume the first 20 percent of losses on a portfolio of "qualifying loans," after which the FDIC will assume 80 percent on the next 10 percent of losses, and 95 percent on losses thereafter.

The resolution of IndyMac is expected to cost the FDIC's insurance fund between $8.5 billion and $9.4 billion. The industry-funded reserve to back deposits fell 24 percent in the third quarter of 2008 to $34.6 billion, the latest fund total available.

The Office of Thrift Supervision said on Friday that it has given IMB HoldCo preliminary clearance to operate IndyMac as a federal savings association under OTS supervision.

After its failure, FDIC Chairman Sheila Bair used IndyMac as a test bed to demonstrate that lenders could modify distressed home loans in a way that benefits the financial institution, investors and homeowners. The new IndyMac will continue that modification program, the FDIC said.

Bair has urged the U.S. Treasury to use about $24 billion in federal funds for incentives to get lenders to adopt similar loan modification plans nationally, but has been met with resistance from Bush administration officials.

The FDIC said the loan modification plan at IndyMac has provided total estimated savings of about $423 million.

PRIVATE EQUITY DEAL

The FDIC said it was not the first time private equity firms have participated in acquiring failed banks. In the early 1990s, the FDIC tapped private equity sources when it sold New Bank of New England and CrossLand Federal Savings Bank.

"Allowing hedge funds to own a bank is a sign of the tough economic times and the need for creativity in turning the economy around," said Scott Talbott, chief of government affairs for the Financial Services Roundtable, an industry group. "Federal banking regulators will continue to consider hedge funds as possible buyers of other failing financial institutions."

The $13.9 billion deal is also an indication that the private equity industry is finding ways to invest capital despite the lack of leverage. The industry has been hammered by the credit crisis which hit buyout firms' ability to buy companies through the traditional leveraged buyout structure.

Relaxation of some rules by U.S. regulators has made it easier for private equity firms to invest in banks, with Flowers being cleared in August by the Office of the Comptroller of the Currency to buy a small bank in Missouri. (Additional reporting by Jon Stempel and Dan Wilchins in New York; Editing by Matthew Lewis and Tim Dobbyn)