A Tale of Greed: How The Old BankUnited Fell Apart

By Martha Brannigan

Published on Miami Herald, July 13, 2009

It took 25 years for BankUnited Financial Corp. to blossom into Florida's largest homegrown financial institution.

But it took just one type of loan to sink its Coral Gables-based bank and trigger its May seizure by federal regulators: The payment option adjustable rate mortgage, or option ARM.

A look at how things went bad at the thrift - now revitalized with fresh capital and under new ownership - offers a window into the real estate and banking debacle that has punished Florida's economy. But it is also a personal tale of greed and control.

Alfred R. Camner, the founder and biggest shareholder as well as the chairman and chief executive until October 2008, led the bank in an ambitious foray into option ARM - a produce many consider the riskiest mortgage ever created.

"The big question is why would Camner bet the bank on one product that turned out to be the most toxic," says Ken Thomas, an independent Miami banking analyst.

That is just one of many questions about Camner's tenure at the bank, a publicly traded company that he ran much like a family business, hiring family members and steering work to his law firm for years.

Camner - who still controls 45 percent of stock through special class B shares with super-voting rights - declined to comment for this article, citing pending litigation.

Camner's troubles came to a head on May 21 when federal regulators swept into parent company BankUnited Financial Corp.'s headquarters and seized its busted bank. Simultaneously, the Federal Deposit Insurance Corp. old the bank to a group of private equity firms led by New York banker John Kanas, that revived the bank with fresh capital.

The FDIC, which will shoulder the bulk of any loan losses, puts the cost to its insurance fund at $4.9 billion. That's the largest bank failure this year and the second most costly flop of a financial institution in the current downturn. BankUnited shareholders are likely wiped out.

How could thins go so wrong?

Camner, a lawyer by training, started BankUnited in 1984 on Florida's west coast. It paid good rates on deposits and bought home mortgages made by others.

Over time, as premier Florida institutions such as Barnett Banks were gobbled up by out-of-state giants, BankUnited became, somewhat by default, the biggest bank based in Florida. Going toe to toe with behemoths like Bank of America and Wachovia, Camner cast about for the right niche.

In 2002, he tapped Ramiro A. Ortiz, a respected banker who was president of SunTrust's Miami operations, as president to build BankUnited's commercial and small-business lending.

But as Florida's housing boom took off in 2004, BankUnited soon found a different forte - in option ARMs. Camner saw the success Marion and Herbert Sandler had in pioneering option ARMs as a highly profitable product that fueled growth at Golden West Financial in California.

Option ARMs, now discredited, give borrowers choices each month: Make a full payment of principal and interest, something in between, or a minimum payment that results in negative amortization, meaning the loan balance actually grows each month instead of shrinking.

It was just the sort of easy credit that speculators flocked to, fueling the rise in home prices between 2003 and 2006. Borrowers figured on making minimal installments for a little while and reselling a home at a quick profit or refinancing to avoid onerous terms that kicked in later.

Under the terms, when loan balances swelled to 115 percent of the original amount, or when the time came for the interest rate to reset, it spelled payment shock for borrowers. Monthly installments instantly skyrocketed, often to double or triple the original amount.

To be sure, BankUnited had plenty of company among large, prestigious lenders in its love affair with option ARMs. The same toxic loans dragged down Washington Mutual, Downey Savings and even Wachovia, which bought Golden West at its peak.

PLUNGING VALUES

What no one seemed to figure on at the time was what would happen when the housing boom ended. Rising mortgage balances and plunging home values conspired to put many borrowers under water, fueling a tidal wave of defaults.

The worst part was that many of BankUnited's option ARMs were based on a borrower's "stated income." These mortgages, sometimes called "liar loans," were approved based on how much customers said they earned, without documentation to back it up. Sometimes the bank didn't bother to verify a borrower's assets or employment either.

Camner's rationale was that borrowers had solid credit scores and many were required to buy mortgage insurance.

But that wasn't enough to skirt the catastrophe.

During the boom, BankUnited sold many of its loans to be packaged into securities, feeding a voracious appetite for this product on Wall Street. That made them someone else's problem - but ultimately everyone's as an overheated real estate market imploded, dragging the nation into its current economic quagmire.

With Camner doing so much business on Wall Street, the company bought an interval ownership unit at the St. Regis Hotel New York, five-star digs with butler service, to put him up.

But only Wall Street soured on mortgages, the bank had to keep the loans on its own books. And regulators allowed the risky loan concentration until it was too late.

With its portfolio of option ARMs burgeoning, BankUnited's profits soared at first. Earnings tripled to a record $83.9 million for fiscal 2006 from $27.5 million the prior year.

ACCOUNTING RULES

Under accounting rules, the bank could book the income for the full mortgage payments even when a borrower paid only the minimum. That boosted BankUnited's bottom line - and under Camner's compensation agreement, which was tied to asset growth and profits, it fattened his bonuses.

As its star was rising, BankUnited was getting generally good marks from federal regulators on loan quality, according to bank officials. And BankUnited's board - many of them Camner's friends - supported him.

"The regulators were giving the bank high grades, so where do you look to find problems?" asked long-time board member Marc D. Jacobson.

"When all the information you are getting from the regulatory people, the top accountants, external auditors, internal auditors - these are all credentialed people - when they're all telling you you're good and you can't point to any problems, where do you look?"

Jacobson added: "When everything is going smoothly, there are no red flags, and by the time the problems show up, it's too late."

A spokesman for the Office of Thrift Supervision, which has been widely criticized for lax regulation during the housing boom, declined to comment on the agency's oversight.

By 2007, with the housing market collapsing, the bank's problems began to fester.

Still, Camner shrugged off warning about the loan portfolio's risks, repeatedly insisting the bank followed conservative underwriting standards.

In a January 2008 conference call with Wall Street analysts, for instance, Camner stressed the bank wasn't like others that were getting into hot water, because it didn't make subprime loans, it didn't piggyback second mortgages along with first mortgages, and its loans were based on whether customers could afford the full monthly amounts, not the optional minimums.

But a recent federal class-action lawsuit by BankUnited shareholders, based in part on interviews with former employees, paints a picture of a bank that was anything but conservative. The suit accuses executives of engaging in reckless lending with shoddy underwriting and says the company made "false and misleading statements" - reporting big profits long after loan problems started to surface and failing to set aside enough reserves for the tsunami that was coming.

The company, however, blames the market. "The bank was brought down by adverse conditions in the residential market that affected the entire banking system," said C. Thomas Tew, the BankUnited attorney. "Some banks got bailouts. We didn't."

A net loss of $25.5 million in the fiscal first quarter ended Dec. 31, 2007 was eclipsed by a $65.8 million loss in the March 2008 quarter and a $111.7 million loss for the next one. After that, with so much uncertainty about its financial condition, BankUnited quit reporting earnings altogether.

In June 2008, BankUnited tried to raise $400 million in a public stock offering, but it flopped. The financial markets were collapsing all around. Camner's super-voting rights, which left public shareholders impotent, made the stock even less attractive. After the failed offering, Camner agreed to put his stock on equal footing with the class A shares that traded publicly.

By then the company was too deep in the hole to attract investors. A parade of investors and private-equity firms peaked under the hood, but no one could make the numbers work without government aid.

CEASE AND DESIST

In September, the Office of Thrift Supervision, which had been steadily stepping up pressure on the company amid alarm at its downward spiral, imposed a cease and desist order, sharply restricting BankUnited's lending and operations. But by then, the bank had already made enough option ARM loans to sink the Titanic.

The same month, a BankUnited shareholder filed a federal class-action lawsuit, since amended, alleging investors weren't warned about its risky loan portfolio and "sketchy appraisal process."

Soon afterward, the SEC's Miami office cranked up an informal inquiry into BankUnited's troubled loan portfolio and other matters.

Efforts to raise capital weren't going well either. Other banks that had bet big on option ARMs were similarly in a death spiral.

By October 2008, several BankUnited board members decided Camner had to go, according to people close to the situation. Faced with his ouster from a once-compliant board, he negotiated a retirement agreement and bowed out Oct. 20.

The retirement pact amounted to a pittance compared to his golden parachute, which was barred by the federal cease and desist order. Still, it called for one year of compensation and cash for his restricted stock. BankUnited agreed to give Camner the honorary title of "chairman emeritus." He and the company agreed in writing to refrain from saying anything disparaging about each other.

Camner's payout required regulatory approval. When BankUnited submitted the agreement to the OTS and FDIC, the feds sat on it. He never got paid. "The OTS did not render a final decision on the BankUnited request regarding Mr. Camner," said an agency spokesman.

His daughter, Lauren, resigned as senior vice president and director the same day as her dad. She too had ironed out a severance agreement. Regulators OKed a reduced amount.

The board promoted Ortiz to CEO.

With the bank's outlook darkening by the day, board members grew worried. The independent directors hired their own legal counsel. The bank bought a $10 million directors and officers liability insurance policy from Lloyds of London to top an existing $20 million policy.

"If BankUnited didn't have a good D&O insurance, half the directors would have resigned," said director Jacobson.

The board's key focus was finding fresh capital.

The Treasury Department's Troubled Asset Relief Program, or TARP, was taking shape as the nation's financial system teetered. But Treasury was reluctant to bail out a crippled institution that wasn't big enough to matter to the overall economy.

By early 2009, BankUnited acknowledged its capital had been wiped out. In April, regulators set a deadline for the bank to raise money. At the same time, they solicited bids from buyers.

"We continue to work on all avenues to recapitalize the bank," Ortiz said at the time. "That includes an equity investment. That includes open-bank assistance. That includes a capital investment on the part of the Treasury."

NEW OWNERS

The FDIC -led sale attracted five proposals from three groups. The winning bid came from a group of private equity firm led by Kanas. They agreed to invest $900 million in the bank, with the FDIC shouldering the bulk of any loan losses.

The FDIC put the cost at $4.9 billion. Only the failure of IndyMac has cost the FDIC more in the current downturn.

At the close of business on May 21, dozens of federal regulators, some wheeling carts, others wearing backpacks, filed in to BankUnited headquarters and seized the bank.

Camner's piggy bank was bust.

No one let the Camners know in advance what was coming. "You know how I found out? I got a phone call," Camner's wife Anne told The Miami Herald at a shareholder meeting the next day. "I found out yesterday at 5:15 p.m. the bank had been seized."