Steven Mnuchin’s OneWest favored private equity firms, did little small-business lending
In 2009, Steven Mnuchin and a handful of other wealthy investors bought the assets of IndyMac, a failed Pasadena savings and loan, and renamed it OneWest Bank.
By the time they sold the institution six years later, it was unrecognizable, a wholly different kind of bank from the insolvent mortgage lender Mnuchin started out with — and a different kind of bank than many of its competitors.
As OneWest expanded into commercial lending, it made markedly fewer loans to small businesses compared with similarly sized institutions. And it grew its assets by making the kind of loans private equity firms use to buy companies, a business that has become more common but was not standard fare for a bank of OneWest’s size. By one insider’s account, it became a huge part of the bank’s commercial lending business.
Mnuchin, President-elect Donald Trump’s nominee for Treasury secretary, will appear Thursday before the Senate Finance Committee, where he’s likely to face a barrage of questions about OneWest’s aggressive foreclosure practices, which have been the subject of concern from regulators and outrage from consumer advocates for years.
But OneWest’s commercial lending practices have faced relatively little scrutiny, though they could provide fodder for both his backers and supporters as the former Goldman Sachs executive and hedge fund manager seeks confirmation.
With Mnuchin as its chairman, OneWest was transformed into a highly profitable commercial bank that was acquired in 2015 for $3.4 billion, twice what Mnuchin and his co-investors bought it for.
“Mnuchin has always been about Wall Street,” said Paulina Gonzalez, executive director of the California Reinvestment Coalition and longtime critic of Mnuchin and OneWest. “He did very little small-business lending, he did a lot of foreclosures and he made a lot of investments in private equity. Will that carry over into his position as Treasury secretary? From the pattern we’ve seen, it seems likely.”
Barney Keller, a spokesman for Mnuchin, declined to comment.
Local private equity investors and bankers say they were initially surprised to see OneWest aggressively pitch loans in the risky world of private equity, where investors look for big returns in part by using large amounts of debt to buy companies and restructure them.
“Everyone has their natural habitat. This is not the natural habitat of a mid-sized commercial regional bank,” said Craig Enenstein, chief executive of West L.A. private equity firm Corridor Capital, who recalled being approached several times by OneWest, though he never did a deal with the bank.
But the focus on private equity made sense for OneWest, both because of Mnuchin’s time on Wall Street — he spent 17 years at Goldman — and because it was a market where banks had pulled back after the financial crisis and recession,bank analyst Bert Ely said.
“I suspect that they looked around at doing activities that maybe most banks of that size would shy away from,” Ely said. “And it makes sense given Mnuchin’s own background.”
Private equity investors in L.A. who were familiar with OneWest said the bank avoided loans to smaller, riskier companies, specifically ones that made profits of less than $5 million a year before taxes, interest payments and other charges. Instead, it would generally write loans only to companies with at least $7 million in such income, and would limit the loan amount to three or four times that income. Loans any larger than that are deemed “higher risk” by bank regulators.
The loans were used to acquire companies through leveraged buyouts — deals in which private equity firms buy a company using some of their own capital, plus a loan taken out on the company itself — and to fund dividend recapitalizations, a practice in which firms borrow against the value of a business and use the proceeds to pay a dividend to their investors. OneWest also made loans to refinance existing debt for private equity-backed companies, according to data provider PitchBook.
The former OneWest banker said the private-equity lending practice was a priority for bank executives and was seen as a way for OneWest to build up its portfolio of commercial and industrial loans — a category of business loans that excludes real estate acquisition.
“The quickest way to do that is to work with private equity firms,” the former banker said, noting that as OneWest was starting its private equity-lending practice, some other banks were still sidelined by the after-effects of the recession. “Most other types of lending, it would take years to take that kind of market share.”
OneWest started its private equity practice in 2011 and, according to the former banker, eventually grew its loan portfolio to more than $1 billion. Banks do not have to break out loans to private equity-backed companies in regulatory reports.
If that $1 billion figure is roughly accurate, it would represent a big chunk of OneWest’s business lending. By the time OneWest was acquired by New Jersey lender CIT Group in summer 2015, it had just $3.2 billion in total commercial and industrial loans.
While private equity was clearly a focus for OneWest, other types of businesses were not. A review of OneWest’s public filings with the Federal Deposit Insurance Corp. show that the bank was a laggard when it came to lending to small businesses.
In the final quarter of 2010, OneWest’s first full year under the ownership of Mnuchin and his associates, it had just $106 million in small-business loans, representing 0.4% of the bank’s total assets. OneWest’s peers — other large savings and loans — had an average of nearly 6% of their assets dedicated to small-business loans.
In a 2012 report about OneWest’s adherence to the Community Reinvestment Act, which requires banks to meet the needs of small businesses and minority communities, regulators noted that OneWest wanted to become a traditional commercial bank and planned to have “an increased emphasis in originating small-business loans.”
But those loans never materialized. In June 2015, the final quarter before it was acquired, OneWest had a still-meager portfolio of just $125 million in small-business loans, or about 0.6% of its assets. Other similarly sized banks averaged about 5.6% of their assets in small-business lending.
If OneWest had met that average, it would have had $1.2 billion in small-business loans, nearly 10 times the amount on its books.
Another type of business was favored by the bank: companies with ties to executives and board members.
Banks must report the value of loans made to insiders and their companies. Starting in 2012, OneWest regularly reported an above-average amount of insider loans compared with similarly sized institutions.
The volume of insider loans climbed substantially in the fourth quarter of 2014, the same quarter during which Mnuchin joined the board of Hollywood studio Relativity Media, a OneWest borrower. The bank’s insider loans hit an all-time high the following quarter, rising to $398 million, or about 1.9% of OneWest’s total assets.
Among more than 50 similarly sized banks that quarter, only three had insider loans representing a larger percentage of assets.
Relativity repaid $50 million it owed to OneWest just before filing for bankruptcy in July 2015. Another Relativity creditor, RKA Film Finance, sued the studio as well as Mnuchin and former Relativity Chief Executive Ryan Kavanaugh, saying some of RKA’s funds were improperly used to repay OneWest.
That case, filed in New York, was dismissed in October, though the judge said RKA could refile. An attorney for RKA told The Times in November that he planned to file an amended complaint.
Follow me: @jrkoren
More to Read
