Dispatch May 2009

Greed, Bankruptcy, and the Super Rich

Shady deals put a ritzy Montana ski resort at risk. Then along came a common-sense judge.

A private ski resort created by a timber baron in the rugged mountains of Montana would hardly seem to be a global bellwether for anything, except perhaps the evolving preferences of the very rich.

Yet the dramatic bankruptcy of the Yellowstone Club, the events that precipitated it, and the way it has been resolved show with unusual clarity the good, bad, and ugly of our current economic predicament. And the club’s future will be a leading indicator of the economic zeitgeist in the age of Obama.

Let’s start with the bad. In 2005, investment bank Credit Suisse was aggressively peddling resort loans, offering developers the opportunity to line their own pockets with the proceeds and offering institutional investors high-yield loan products whose risks were vastly underestimated.

Tim Blixseth, founder and dominant shareholder of the Yellowstone Club, was among the many who found the money irresistible. First he was going to take $150 million. Take a little more, urged the investment bank. Hell, take a lot more. And he did, finally closing on a $375 million loan, and, as explicitly permitted in the loan agreement, immediately transferring $209 million of it to his personal accounts.

When he and Jeff Barcy, the lead Credit Suisse banker, couldn’t agree on the fee, they flipped a coin. (Blixseth won, and Barcy got 2 percent instead of 3 percent.) Appraisals? Cash-flow projections? The ability of the borrower to re-pay? Ah, not to worry, these small details didn’t require much attention, because Credit Suisse didn’t have any money at risk anyway. The loan would be packaged and sold as part of so-called collateralized loan obligations, putting possible future problems on the shoulders of institutional investors like hedge funds and pension funds.

Credit Suisse did more than half-a-dozen resort deals like this, totaling close to $3 billion. How many other loans of this nature were made between 2002 and 2006, by most of the biggest names in banking? (Answer: a lot.)

Now we get to the ugly: The club had minority shareholders, including cycling great Greg LeMond, who thought they should get a share of the windfall. They sued the club and Blixseth, who finally settled for $38 million (though the judgment was never fully paid).

Blixseth, always looking for ways to expand his reach, hatched a new plan to lure the über-rich. Yellowstone Club World would offer elaborate vacation timeshares at exotic overseas properties, including castles and private islands bought with the Credit Suisse loan proceeds. But that plan quickly disintegrated, leaving Blixweth with a pile of expensive (and soon all but unsellable) assets.

By 2007, the club was facing serious cash flow problems, stemming from the heavy debt service on the Credit Suisse loan, profligate spending, and erratic management. Blixseth decided to sell the property, but the deal fell through. Tim and Edra Blixseth, meanwhile, were getting a divorce. They fought it out in court even as they continued to spend lavishly—seemingly oblivious to that fact that their empire was on the brink of collapse. Edra got the club in the divorce, and with it the huge debt load.

When the real estate meltdown hit, bankruptcy was only a matter of time, and a Chapter 11 filing came last November.

Credit Suisse, still the agent for the outstanding $310 million on the loan, responded by calling the lawyers. The Yellowstone Club bankruptcy was an evil conspiracy, argued the men from Skadden Arps, a plot by Edra Blixseth and Sam Byrne (the private equity investor who had tried to buy the club in early 2008). And besides, they argued, we’re the first-lien holder! We have our rights! Don’t stand in our way or we will lawyer you to the death!

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