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Originally published August 21, 2011 at 10:00 PM | Page modified August 22, 2011 at 10:39 AM

In Person | Andy Beal builds empire buying on the dips

Andy Beal's focus on beaten-down loans makes him look like a hedge-fund manager. He's not; he's a banker.

Bloomberg News

quotes Sounds like he's into Social Justice. Rehabs buildings, buys loans of bankrupt... Read more
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Andy Beal's road to becoming a billionaire, doing deals with the likes of Carl Icahn and Donald Trump, runs straight through the slums of Newark, N.J.

It was 1981, and Beal, then a 29-year-old vulture investor, was scoping out two 16-story apartment buildings owned by the Department of Housing and Urban Development.

The bricks were chipped and bulging off the exteriors. Tenants had pried open the elevator doors and thrown furniture down the shafts.

Beal liked what he saw.

He and a partner bought the towers for $25,000 and a promise, backed by a $2.5 million letter of credit, to fix the bricks.

They did the repairs — employing armed guards for protection when visiting the apartments — and never tapped the credit line before selling the buildings two years later to a New York doctor for $3.2 million.

In the past three decades, Beal has made a fortune buying distressed assets. He snapped up bonds of power companies during the California blackouts in 2001, debt backed by jetliners after the Sept. 11 attacks, and billions' worth of commercial and real-estate loans after global credit markets froze in 2008.

In between, the investor with a restless mind started a company to build rockets and beat a rotating team of pros at Texas hold'em in the world's richest poker game.

Beal's focus on beaten-down loans makes him look like a hedge-fund manager. But he's a banker.

His Plano, Texas, company, Beal Financial, owns three banks. Deposits are insured by the Federal Deposit Insurance Corp.

That means Beal, 58, raises money for his investments by promising these days to pay depositors just 1 percent a year.

A small bank in New Mexico he bought in 2010 offers checking accounts. Otherwise, his 34 branches offer only savings accounts and certificates of deposit, which are less expensive to manage.

"It's an FDIC-insured hedge fund," says Sherrill Shaffer, who worked for the Federal Reserve for 17 years and is a professor at the University of Wyoming in Laramie.

Unlike a hedge-fund manager, Beal doesn't have to divvy up profits with investors. The banks controlled by Beal Financial have shareholder equity of $3.2 billion, according to the FDIC, and he owns the entire company.

High-profile friends

A native of Lansing, Mich., Beal has collected an A-list of partners and friends. He's pals with developer Trump. He talks history with Gabe Kaplan, creator and star of the 1970s sitcom "Welcome Back, Kotter."

He's done business with Carl Icahn, the corporate raider. Former President George W. Bush visited Beal's offices after leaving the White House.

This year, Beal attended the Las Vegas wedding of his friend Steve Wynn, the casino developer. Clint Eastwood was the best man.

Beal, who flies commercial and drives a Ford Excursion sport-utility vehicle around Dallas, says he still reviews every deal his company does to make sure he's not spending too much. These days, he is hitting the brakes because he sees a bubble inflating.

Stocks and corporate bonds have rallied the past two years because the government dumped money into the economy in the form of rock-bottom interest rates and imprudent deficit spending, Beal says.

"Today's markets are being supported by a flood of money," he says. "There are so many lenders in a race to the bottom when things are good. We don't participate in that."

Trump, who borrowed at least $600 million from Beal's banks during bankruptcies by his casinos, says investors should heed the banker's warning.

"He has 20/20 vision into what is going to happen in the future," says Trump. "I know lots of smart bankers. Andy is right at the top of the list."

Beal's politics — he's a self-declared libertarian — seem an odd fit for a banker who relies on federal guarantees to attract deposits. He loathes big government and gives money to politicians who vow to dismantle it. Until they do, he plans to avail himself of federal programs to make money just like the next guy.

"I hate big government," Beal says. "I don't like the government-issued paper currency or the laws that require its use. But those are the rules, and I live by them."

In buying loans, Beal takes heftier risks with FDIC-insured money than do many bankers. Delinquent loans accounted for 21 percent of all loans at Las Vegas-based Beal Bank Nevada, the largest of his three banks, compared with an average 5 percent for all U.S. banks as of March 31.

Taking bigger risks is legal as long as Beal abides by rules that bar banks from owning equity in nonfinancial companies or buying most debt rated as junk without dispensation from regulators, Shaffer says.

Beal's banks also must hold extra capital because they make riskier loans, says George Burns, commissioner of Nevada's Financial Institutions Division, a regulator.

Beal Bank Nevada is stockpiled for Armageddon. It had $2.2 billion of equity capital at the end of 2010. Equity for a bank is the amount of assets — its outstanding loans — minus liabilities, or deposits.

Beal Bank Nevada's equity capital accounts for 35 percent of total assets, according to FDIC data. The average U.S. bank had an equity-to-asset ratio of just 11 percent at the end of 2010.

Off-the-charts results

Beal's profitable trades have produced almost off-the-charts results compared with other banks. Beal Bank Nevada had a return on equity of 27.4 percent in 2010 versus an average 5.9 percent for all U.S. banks, according to the FDIC.

Beal says he succeeds because he does his homework and always buys loans that have collateral that he can get if the borrower defaults.

He could get richer if he got out of banking with its costly regulations and formed a hedge fund, says Tim Yeager, associate professor at the University of Arkansas in Fayetteville.

"He's paying nothing on deposits and making extremely high returns on assets," Yeager says. "But he could make more money, I promise you, by not being a bank."

Beal toyed with the idea, starting an affiliate called CLG Hedge Fund. He says he put Hedge Fund in the name because he wanted its employees to think like hedge-fund managers, buying and making higher-yielding loans.

He even put them in separate offices in Frisco, 18 miles from his bankers in Plano.

CLG never operated as a hedge fund, partly because Beal didn't want to share his returns.

"Interfacing with regulators is one thing," Beal says. "Taking calls constantly from various investors is intolerable. Also, why split profits?"

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