The generally accepted version of events leading to the fall of Thornburg is nicely laid out in a new book, House of Cards, by William Cohan.
Cohan explains how Thornburg Mortgage funded its operations “most often by obtaining short-term, often overnight, borrowings” backed by the mortgages it held.
In February 2008, the Swiss bank UBS reported an $11.3 billion loss based on US mortgages designated as “Alt-A.” Alt-A falls somewhere between prime and subprime. Subprime itself has become a euphemism for “toxic.”
All credit ratings became suspect. “Terrible mortgage securities made up of junk were rated AAA. And fine mortgage securities made up of our fine mortgages were rated AAA,” Thornburg told investors last year.
Thornburg’s creditors started making “margin calls.” That means they demanded extra money to ensure they didn’t lose on Thornburg’s bets. Over the three months leading up to March 2008, “Thornburg received margin calls totaling $1.777 billion” and came up $610 million short, Cohan writes—“a dismal performance.”
The stock fell rapidly.
“I would consider both Garrett and Larry Goldstone to be very, very smart guys,” Chicaferro says. “But I don’t know how smart you’d have to be to predict this would’ve happened.”
Maybe as smart as Yale economist Robert Schiller, who predicted such a crash in 2005. He wasn’t alone.
“It wasn’t all that hard. There were a few fantasies you had to not buy into. One is that housing prices always go up and stock prices always go up,” Eric Janszen, a former venture capitalist and author of a forthcoming book, The Post-Catastrophe Economy, says. “That’s how these credit bubbles work. Everybody’s happy on the way up because everybody seems to be making more money.”
In the accepted version of events, Thornburg was a victim. “Thornburg is often referred to as one of the good guys that’s having trouble. What they mean by that is Thornburg was always very firm on maintaining a high-quality loan portfolio,” Chicaferro says.
There is another explanation, as told in pending shareholder lawsuits against Thornburg. Those investors claim Thornburg Mortgage disguised its exposure to subprime loans. The company denies this.
One case, Slater v. Thornburg, was recently consolidated in federal court. It claims that by April 2007, Thornburg acknowledged “burgeoning concerns” with the Alt-A market but assured investors that their money was safe because Thornburg was “different.”
On Aug. 8, 2007, Goldstone met with three Thornburg Mortgage investors in his Santa Fe office, the suit claims. In the meeting, Goldstone allegedly admitted the source of the company’s day-to-day operational funding had “dried up.”
“Unbeknownst to the attendees of the meeting and investors,” the suit claims, Thornburg “was just two days away from commencing the sale of 35 percent of its highest quality mortgage-backed assets to meet margin calls.”
According to the suit, “the constant fear of bankruptcy” drove executives into “a deliberate pattern of concealment and selective disclosure.”
The suit also faults executives’ pay plan. In 2007, the suit says, Thornburg Mortgage employees earned $26.1 million in base compensation, plus $23.1 million in performance bonuses. Another lawsuit pins Garrett Thornburg’s 2006 compensation (from Thornburg Mortgage alone) at $883,000.
Problem was, the suit claims, the company paid bonuses for growth regardless of where the market was headed, creating a “conflict of interest” between executives and shareholders.
“There is no conflict of interest. We believe [the suit] has no merit,” Thornburg Investment Management spokesman Miller says. “The incentive program for the senior officers was based directly on the amount of money returned to shareholders.”
Litigating shareholders say Thornburg Mortgage overborrowed—leveraging up to $12.50 for every $1 it held in equity, well over what federal regulations allow for commercial banks.
“Thornburg Mortgage wasn’t the only company out there that was leveraged,” Chicaferro says. “The only real estate investment trust that didn’t use leverage was Redwood Trust, in California.”
Redwood Trust lost $444 million last year, but remains in business. “We like to keep our name out of the press,” Investor Relations Director Mike McMahon says.
Not Thornburg. Texas billionaire Richard Rainwater, who lost $70 million in two months on Thornburg Mortgage stock, first learned of the company when he saw Goldstone on television. It was “the single worst investment of my career,” Rainwater told BusinessWeek last year.
Chicaferro retired in 2006, selling his stock before the crash. He credits advice from his financial planner. “I get on my knees and bow to her every other day,” Chicaferro, who now “lounges” in Scottsdale, Ariz., says.
Thornburg took hat in hand. Investment group MatlinPatterson lent Thornburg $1.35 billion in 2008, only to abandon its stake last month. Last summer, Thornburg traveled to Washington, DC and met with Federal Reserve Chairman Ben Bernanke, Treasury Department officials and staff for US Sens. Jeff Bingaman, Chris Dodd and for Rep. Barney Frank, among others. Help didn’t come.
“We are lucky to be here today,” Thornburg told investors later. “And basically, the only ones that really survived this were if you were a bank and had access to the federal funding.”
Brilliance wasn’t enough for Thornburg.
“The ‘genius’ element was very simple. There were two parts to it. No. 1, we had 1 or 2 percent short-term interest rates. He’s making loans at 5. And he can borrow money at 2. Of course he’s making money. The other part is he wasn’t content with making money at that spread, and he leveraged. He started borrowing and borrowing and borrowing to make more loans and make more income at that spread between 2 and 5 [percent],” Collins says. “He wasn’t a genius because Bernanke set the short-term interest rate at Thornburg’s benefit. He just happened to be in the right place at the right time.”
Many other companies that borrowed heavily are now defunct. “There’s a lot of geniuses out there, right? No end of geniuses,” Collins says.
What Thornburg needs now, Chicaferro says, is time.
“A bankruptcy would do that. It would give them time to reorganize,” he says.
It’s too late for 130 laid off Thornburg Mortgage employees. But Garrett Thornburg will be OK.
Last month, Richardson named Thornburg to a commission to save the bankrupt College of Santa Fe. Thornburg and his third wife, Catherine Oppenheimer, who founded the National Dance Institute of New Mexico, are involved in a new charter school for the arts.
The couple had a son in April 2000. Their $906,000 home on Thunderbird Corto is a short drive from the campus, soon to be emptier.
The company jet, part owned by Thornburg personally, is not up for sale. Thornburg’s 29-year-old son has his own small plane. Before spring break, flight records show it flew to Provo in the Caribbean, several islands east of where his parents married.
Back in Minnesota, Thornburg sold the farm. Beginning in 2007, Thornburg Sheep Co. began selling off hundreds of acres for approximately $2 million.
“It sold real well,” broker Dan Pike says. “They still own some land back here, but not much.”
(According to Thornburg spokesman Miller, “No one in the family desires to continue in the farming business.”)
All that’s left in the Thornburg name in Minnesota, property records say, is a home in downtown Lakefield. An open house was advertised in February for that “unique Frank Lloyd Wright style-house [sic] located on a great private setting.”
Prospective buyers beware. It’s harder to get a mortgage these days. SFR
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