Texas billionaire Andy Beal isn’t a household name. He’s best known in some circles as the main subject of the book The Professor, The Banker and the Suicide King, which is about his quixotic $100,000-per-hand poker match against many of the game’s top pros (he got his clock cleaned).
Perhaps part of the reason he’s an unknown is that even though he’s a banker, he retrenched his business during the credit boom, even going so far as to lay off employees.
But now that the bubble’s over, he’s stepping on the gas pedal, buying distressed loans, hiring and lending more than ever to businesses that have nowhere else to go.
Forbes: By September 2004 Beal Bank’s assets had climbed to $7.7 billion. Then Beal stopped buying, letting his loans run off. By September 2007 assets had shriveled to $2.9 billion, one-fifth of which was cold cash. He was worried that consumers had taken on too much debt and money was being lent to companies for next to nothing. “Every deal done since 2004 is just stupid,” Beal says.
He began by pulling back from home loans–even those guaranteed by Fannie Mae and Freddie Mac Beal thought the two quasi-government agencies were over-leveraged. When staffers mentioned their guarantees in deal presentations he would fire back that these guarantees were “worthless.”
Not surprisingly, given the incompetence of regulators, it was his bank that drew suspicion.
In late 2006 he sold $74 million of preferred stock although he had no immediate use for the proceeds. He says he couldn’t resist the “stupidly mispriced” terms–as low as Libor plus 1.7 percentage points for 30 years. He wanted as much money available when the boom turned to bust. With the extra money the bank could pay off nearly all its depositors with capital on hand–nearly unheard of in the history of banking.
Then came a shocker: Amid one of the most reckless lending sprees in history, regulators focused on the one bank that refused to play along. Beal’s moves confused and worried them, and so they began to probe him with questions. “What are you doing?” he recalls them asking. “You’re shrinking yetyou’re raising capital?”
Says Beal about the scrutiny, “I just didn’t fit into any box.” One regulator, the former head of the Texas Savings & Loan Department, Charles Danny Payne, says, “I was sceptical at first, but I’ve gained a lot of confidence over the years,” adding that Beal has an “uncanny ability to sniff out deals.”
Next, the credit rating agencies started pestering him about his dwindling loan portfolio. They never downgraded him but scolded him for seeming not to have a “sustainable” business model. This while their colleagues were signing off on $32 billion of bum collateralized debt obligations issued by Merrill Lynch.
It’s really quite amazingly backwards this story is. To some extent, it even gives the lie to the idea that the problem was a lack of regulation. Turns out the credit agencies and the regulators were looking out for the abnormal and the unusual. They weren’t just sitting behind their desks twiddling their thumbs reading Chris Cox’s dogeared copies of Atlas Shrugged.
These days Beal’s still fairly pessimistic and predicts that about half the country’s banks, 4000, would go bust if they were being honest about their books.
But the good news: Now he’s the model banker, though once again he’s annoying the government. Sheila Bair seems to think of him as a nuisance picking off assets at too-low prices and generally not playing ball with everyone else. But it should be obvious we need more Andy Beals, not less.
(photo courtesy Amy Calistri)
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