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Vultures Circle Wall Street, But Hesitate To Feed

When financial panic sweeps Bedford Falls in the 1946 movie "It's a Wonderful Life," the villain, Mr. Potter, moves to snap up the Bailey Bros. Building and Loan, offering a fire-sale price of 50 cents on the dollar.

"I may lose a fortune," Potter says with a smirk. The picture's hero, George Bailey, knows better. "He's picking up some bargains," he tells stockholders.

That kind of bold opportunism has made capitalists rich for centuries. Now, legions of like-minded bargain-hunters stand ready to do some Potter-style shopping of their own amid the nation's financial crisis.

"Vulture" investors, as they are called, have raised tens of billions of dollars over the past year in anticipation of opportunities to scavenge distressed assets and debt at discounted prices.

Speculators are eyeing potential profits in many of the same areas now at the center for the financial mess: real estate in foreclosure-plagued Florida, high-yield commercial paper, and pools of questionable mortgages.

Yet, so far, most have hesitated to swoop in. Instead, they have circled and watched for nearly a year as the turmoil worsened, wary about committing to anything with the financial system in chaos.

"These people have been waiting for the bottom to be reached before they plunge in, and then they take the risk of having the price drop even more," said Roy Smith, a finance professor at New York University.

The vultures have been skittish for another reason: The poorly performing mortgages at the root of the crisis were repackaged, resold, sliced apart and pooled together in so many complicated ways that even the best-trained experts have trouble understanding their value.

"There are investors who have pools of loans, and they don't know where the assets are," said Harvey Green, chief executive and president of Marcus & Millichap, a large commercial real estate investment brokerage based in Los Angeles.

Some of these factors might begin to change in the coming months as the federal government begins trying to stimulate the credit markets with its $700 billion bailout.

If it works, the private sector may be ready to pounce. Dow Jones Private Equity Analyst said Tuesday that 18 distress funds have raised $37.9 billion so far this year. One big player, Oaktree Capital Management, has set aside a whopping $10.6 billion to invest in distressed debt. Goldman Sachs announced last fall that it had raised $4.5 billion to invest in distress opportunities in the credit markets. Even Lehman Brothers had been preparing a $1.25 billion fund for distressed mortgage-backed securities before filing for bankruptcy last month.

"There is much more money raised for these distressed assets than there are distressed assets themselves," said Tomasz Piskorski, assistant professor of finance at Columbia University.

Other entities have begun to mobilize in response to the crisis, such as high-powered law firms and factory-like operations designed to rehabilitate bad mortgages.

Former Mayor Rudy Giuliani's law firm, Bracewell & Giuliani LLP, has formed a task force to help corporate clients understand legislation and regulatory issues related to the bailout, a politically delicate move that Democrats seized on in trying to paint the Republican as taking advantage of the crisis. Republicans called such attacks ridiculous.

In a news release on Oct. 7, the firm said one "silver lining" to the economic crisis is the opportunity for risk-taking investors to pick up distressed debt at a rock-bottom price. Bracewell & Giuliani is one of hundreds of firms looking to put their lawyers to work untangling the financial mess.

Some investors have already started to position themselves for forays into the problematic mortgage market by hiring teams of specialists who will attempt to rehabilitate bad loans by renegotiating them with the homeowners.

Investors may pick up these mortgages for a fraction of their potential worth. But trying to make toxic loans work is time-consuming and labor-intensive, and carries huge risk of its own. People in repayment plans often default a second time, said Mani Sadeghi, a managing partner at Equifin Capital Partners in New York, which has set up a company that invests in mortgages and distressed loans.

Despite the "vulture" label, Sadeghi suggested there is a white knight aspect to the task. These bad loans are taken off bank balance sheets, "where they are acting as a cancer." And the homeowners get a shot at keeping their property.

"We're trying to create better outcomes than foreclosures," Sadeghi said.


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