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.