The House Thornburg Lost

Behind Santa Fe's devastated mortgage company lies an American story of triumph and loss

The first time Garrett Thornburg was hurt by the foreclosure of someone else's home, it was 1986. The house was off Old Pecos Trail, at 512 Camino Lejo. It belonged to Thornburg's first wife, a Swedish artist, who lived there with the couple's son, then 6.

The second time is now. The process took years and involved thousands of Americans who couldn't afford their home loan payments. The mortgage crisis ruined Thornburg's balance sheets—and the country's.

Unlike many fellow magnates, Thornburg has felt the economy's harsher side. He even once collected unemployment, so perhaps he can relate to his former workers.

At his top, Thornburg's jet landed in Paris; he fished in Patagonia. Newspapers called him a genius. Charities honored him as a "treasured citizen." Politicians paid respect to a man whose business they may not have understood, except to the extent that it was successful.

Thornburg's empire was built on his grasp of both market trends and government regulations. Then the ground moved. Last week, after 14 years of growth and two years on life support, Thornburg Mortgage announced its bankruptcy. The word came on April Fools' Day. Nobody laughed. Two days later, the company laid off 130 of 150 employees.

A “difficult day,” CEO Larry Goldstone called it.

As rise-and-fall stories go, Thornburg’s is neither the biggest nor the most shocking. But it is worth studying because Harold Garrett Thornburg Jr. is more than a man of his time. He is a man who made his time.

Thornburg declined an interview.

“Here’s this guy, a Harvard Business School alumni: Why in the hell did he come to Santa Fe, New Mexico to start up an investment and real estate company? He expected to become—and he did—a big fish in a small pond. That’s a peculiar kind of person. That’s a personality profile that leads people to think they’re the master of the universe,” Patrick Collins, a retired Wall Streeter who campaigned against Thornburg’s new Ridgetop Road headquarters, says.

“Two years ago, he was the chairman of a New York Stock Exchange-listed company. He was pumping out good cash dividends to the owners of Thornburg Mortgage, Inc. He was building this famous—in his estimation—building. Now he’s the chairman of a company that is not a favorite of a lot of people who owned the stock at $40 and now it’s 5 cents.”

(The stock actually peaked at $32 about a year ago; it’s now 1 cent.)

When a big fish flops, the ripples go far.

Thornburg’s finances are Santa Fe’s problem. It hurts to have 130 people lose well-paying, financial-sector jobs. “I have never worked for a finer man or a finer company,” David Miller, spokesman for Thornburg Investment Management, which remains in business, says.

The bankruptcy also raises questions. Those jobs, and the wealth they created, justified the tax breaks Thornburg’s companies won over the years and the public accolades they’ve received. Was all that deserved?

And how did it come to this?

Garrett Thornburg was born in January, 1946. He grew up in tiny Lakefield, Minn., where his father was a livestock broker; a 1949 edition of the Lakefield Standard records Thornburg Sheep Co. purchasing a prize lamb for $1.10 a pound.

The post-war economy replaced family farms with shopping malls; Thornburg's generation would bury manufacturing under paper—finance, insurance and real estate. "I was an entrepreneur since I was about 5 years old," he told The Santa Fe New Mexican in 2000.

Thornburg left Lakefield for a military prep school and went on to Williams College in Massachusetts. He graduated Harvard Business School—the tycoons' training ground—in 1970. Thornburg's classmates included George W Bush's treasury secretary, Hank Paulson, who devised last year's $700 billion bank bailout.

Out of Harvard, Thornburg didn't follow his peers to Wall Street. He went to Jamaica, where, with US government financing, he developed a 311-unit housing project.

In December 1971, still in Jamaica, Thornburg married Inger Jirby, an artist from northern Sweden, who speaks seven languages. She now runs a gallery in Taos.

When the couple left the West Indies, Thornburg tried his hand at banking in London, then real estate in New York City. He failed. "I was probably the first Harvard MBA to be on unemployment," Thornburg told New Mexico Business Weekly in 2006.

He rebounded with a position at what is now the Empire State Development Corporation. There, Thornburg worked on financing to turn the old Commodore Hotel into the Grand Hyatt—one of Donald Trump's early real estate splashes.

"It was made financially plausible by a 40-year tax abatement from the city—the first ever granted to a commercial property," The New York Times reported in 1983. "Since there was no statutory basis for tax relief to a private commercial developer, Mr. Trump offered to sell the hotel for $1 to the Urban Development Corporation [where Thornburg was then chief financial officer] and lease it back for 99 years at a modest rental in lieu of taxes."

The quasi-public sector launched Thornburg to Bear Stearns, the recently deceased investment bank. The Times blurbed Thornburg in June 1979, when the company made him a vice president. Four months after that promotion, Jirby gave birth to a son, Lloyd.

Life was good. Jirby recalls the biggest shock of their marriage came at a party in Southampton, NY when she learned Thornburg could play drums. "Garrett is the smartest man I've ever met. And he has 'star' written on his forehead," Jirby tells SFR.

Michael Zarin, named a Bear Stearns VP at the same time as Thornburg, remembers him as talented and scrupulous. "He came with a very high degree of self-confidence, which was merited," Zarin, who runs an investment firm on Long Island, NY, says.


Thornburg helped Donald Trump turn the old Commodore Hotel in NYC into the Grand Hyatt.

At Bear Stearns, Thornburg told interviewers, he developed expertise in using public "industrial revenue bonds" to benefit private developers. By all accounts, Bear Stearns wasn't interested. The corporate culture was "vicious," Zarin recalls. "If something was your own idea, it was very difficult to move it forward…I think Garrett probably had a push within himself to do things on his own."

Whoever pushed, Thornburg and Jirby left for Santa Fe, where they had summered. It was an odd move for a power player. But not for a landscape painter.

"New Mexico is very perfect for me," Jirby says. "Maybe it was a disadvantage [for Garrett] to be in a small place like Santa Fe."

In 1982, in a small office on Galisteo Street, Thornburg founded Thornburg Investment Management. The company managed mutual funds (and still does—$34 billion worth, as of Dec. 31, 2008). To market those funds, he founded Thornburg Securities. There was no internet. Skilled workers had to be lured.

"Investment bankers from New York always got confused: 'Where? New Mexico? Do I need a passport?'" Ron Chicaferro, who moved from California to join Thornburg, recalls.

As Thornburg's businesses flourished, his marriage soured. Jirby filed for divorce in 1986, citing a "conflict of personalities."

During their separation, Thornburg paid Jirby $2,500 a month to care for herself and their son. Jirby claimed her husband "enjoyed a lavish lifestyle." In tax returns filed with the case, Thornburg claimed income of more than a quarter-million dollars a year.

Jirby and Thornburg had taken out a mortgage to remodel a home Jirby had purchased, where she and Lloyd lived. She claimed Thornburg stopped making the $3,000 monthly mortgage payments and "interfered" in the home sale, thus ensuring foreclosure.

Ultimately, Jirby would keep sale proceeds from the home, the art and physical custody of their son. Thornburg would keep his company stock and his tax-deferred retirement account. He would also keep his father's gun collection and his interest in Thornburg Sheep Co. back in Minnesota.

Jirby would not discuss the divorce. She never remarried. Thornburg did, in 1990, to Juliana Feldman. (When they divorced six years later, Juliana got a $600,000 settlement, the Lexus, a fur coat and the shar-pei.)

Jirby is not surprised Thornburg stayed in New Mexico.

"I think Garrett liked Santa Fe very much. I also think he was establishing his company here; to pull up and leave after that would have been very difficult," she says.

Thornburg didn't leave. Instead, he tried to make New Mexico work for him.

Documents show Thornburg paid $11,000 in state and local income taxes in 1985. Evidently, he thought his companies, already worth millions, should pay even less.

In 1989, Thornburg sued the state of New Mexico's Taxation & Revenue Department. Thornburg Investment Management and Thornburg Securities had paid $115,000 in gross receipts taxes over two prior years. His lawyers claimed Thornburg Management only truly owed $646, while Thornburg Securities owed zero dollars. The state paid a partial refund of $15,600.

The tax-avoidance strategy, foreshadowed by Thornburg's New York bond deals, was transplanted to New Mexico.

(It helps to have favorable tax laws. In 2007, New Mexico Sen. Shannon Robinson and Rep. Daniel Silva—both Albuquerque Democrats who lost re-election in 2008—introduced bills that created a tax break for finance companies. Supposedly, it would attract new businesses. The Legislative Finance Committee suggested the true benefit lay elsewhere: "LFC is aware of one company already located in New Mexico, Thornburg Investment Management, which will benefit from the proposed deduction"—to the tune of $210,000 annually. The bills died.)

Thornburg Mortgage was founded in 1993 with tax advantages in mind. The company is structured as a Real Estate Investment Trust. An REIT, unlike a regular company, is exempt from corporate income taxes. The disadvantage is that REITs must pay out 90 percent of profits to shareholders. This limits reinvestment in the company—at least without borrowing.

Thornburg Mortgage was not a "retail" operation like, say, Countrywide, the most infamous of subprime mortgage lenders. Thornburg bought in bulk home loans made by other companies to the most creditworthy borrowers, and sold those loans as securities.

The company suffered when interest rates rose in 1994. A few years later, it endured a wave of prepayments by borrowers. "We got hit over the head with a 2-by-4 twice, and even a donkey could learn by getting hit twice with a 2-by-4," Thornburg told Mortgage Banking magazine in 2003.

Chastened, Thornburg changed course. In 1998, he hired Ron Chicaferro, then working for another REIT, to lead Thornburg Home Loans. Instead of just buying loans, the company would make them, too. Thornburg found borrowers over the internet and through "correspondent" lenders around the country. The strategy saved tons on storefronts and salespeople.

The company sold "super-prime" "jumbo" mortgages—big houses for rich people—which few New Mexicans could afford. Thornburg often said that 97 percent of his business was out of state.

"Garrett always, always, always purchased only the best loans. That was always the mantra from day one until the day I left," Chicaferro says.

Thornburg's reputation grew. By 2004, the adopted Santa Fean was lionized as an odd Western wizard. Washington Post financial columnist James K Glassman began a column with a friend's advice to "Find Garrett Thornburg…This guy has the best financial mind in America."

Glassman saved special praise for Thornburg Mortgage: "What makes it attractive is its whopping dividend yield, now 10.1 percent"—compared to, say, 2.1 percent for Nike today. "What makes it Thornburgesque is its way of doing business, which is both unusual and elegant," Glassman wrote.

When people start putting "esque" after your name, you've made it.

While delighting investors, Thornburg angered neighbors. The issue was relatively pedestrian: traffic.

In 2003, a large landowner, Santa Fe Estates, announced plans to sell hilltop property to Thornburg. Neighbors had thought the land would stay vacant, and feared development would make Tano Road a death trap.

"Everybody's happy and, all of a sudden, here's Thornburg," Patrick Collins says.

Calling themselves Concerned Citizens of Santa Fe North, Collins and few other well-heeled residents sued to stop the construction of Thornburg's planned headquarters on Ridgetop Road. For many years, his companies had rented space downtown on Marcy Street.

The lawsuit, which failed, took years to work through the courts. It was divisive. "People were getting really pissed off," Collins says.

Meanwhile, Thornburg's political allies pushed the project forward.

Mallorie Gura

Thornburg’s new campus on Ridgetop Road was built thanks to property tax breaks for his companies.

On Jan. 4, 2007, Gov. Bill Richardson summoned Concerned Citizens to his office, Collins says. He felt Richardson wanted his group to back down.

The governor said Thornburg was a good friend of his, that Thornburg was a good civic leader, that the financial businesses that Thornburg had created in Santa Fe created high-paid jobs. And that he wanted that building—he being the governor—to be a monument of the potential of Santa Fe to be a financial center," Collins says. "And so we smiled and said, 'That's wonderful, but we haven't changed our minds.'"

Richardson spokesman Gilbert Gallegos refused comment "on someone's impression of a private meeting [the governor] may have had."

Whether Thornburg got an assist at the state level is unknown, but he openly lobbied at the local level. Thornburg wanted the city to help finance his new campus with a $45 million industrial revenue bond, similar to the deals he had arranged in New York. Critics were a minority.

"We were targeted," Santa Fe Councilor Miguel Chavez, who voted against financing the Thornburg campus in 2007, says. Thornburg funded Chavez' Council opponents in the 2004 and 2008 elections.

Former Councilor Karen Heldmeyer, the other "no" vote, says she grew frustrated by "backroom deals" and decided not to seek re-election. She says it's fair to say that Thornburg bullied the city.

"Rather than just rolling over and playing dead, the administration could've said, 'There's good points on both sides. Let's see what we can negotiate. Let's show some leadership.' That wasn't the case," Heldmeyer says. "It was, 'Oh my god, it's Garrett Thornburg…He's rich. He provides jobs in town. He backed several people's Council races. Therefore, we should give him what he wants.'"

Other local institutions rallied for Thornburg. The New Mexican said residents "should be glad the company didn't grow weary of NIMBYism and forsake Santa Fe for Santa Barbara or some other la-di-dah address," in an editorial against Concerned Citizens.

"Any way they could find to put a favorable slant on this, they did. The [Albuquerque] Journal asked a few questions. Nothing ever came of it," Collins says.

The New Mexican's headline when the City Council approved the bond: "Thornburg deal benefits schools."

That was an overstatement, at best.

The new Thornburg campus, which opened this year, looks down over the city like a citadel. The bond deal behind it resembles a labyrinth.

"That deal was done to avoid taxes," Lewis Pollack, another Concerned Citizen, says.

When most people buy a home or office building, they pay annual property taxes. That money goes to the state, the city, the county, the public schools and Santa Fe Community College.

Thornburg got a better deal than any ordinary homebuyer would be able to negotiate. Under the terms, the city owns the campus property and leases it to Thornburg. The city then uses the rent money to pay down a $45 million, tax-exempt bond it sold directly to Thornburg at 15 percent interest. In 2037, when Garrett Thornburg is 91 years old, his company will purchase the land and building for $1. Then and only then will the company pay property taxes.

In theory, the deal is a wash for the city. Yet Thornburg's counsel estimated on paper the deal would save his companies $397,000 a year in property taxes, because Thornburg doesn't technically own the property.

Instead of taxes, Thornburg agreed to pay the city a flat sum of $25,000 a year. However, according to Thornburg's possibly lowballed estimate, the state, the county and the schools are out $368,000 a year.
"I don't think it ever came up," former County Commissioner Jack Sullivan says. "There's nothing we could've done except jawboned if we thought it was a bad idea."

In their bond application, Thornburg's team noted that he donates $35,000 a year to Partners In Education Foundation, a nonprofit, and more than $100,000 a year to Santa Fe Public Schools. SFCC is supposed to get $15,000 a year for the next decade starting later this year, spokeswoman Janet Wise says.

Donations are voluntary. Unlike taxes.

"Shouldn't we all go through the same process?" Chavez says. "We don't know where the money's going, what the impact is or what the rate of return is."

Peter Dwyer, a former Santa Fe city attorney, says industrial revenue bonds are "an inducement to try to get things that are of benefit to the community as a whole." The supposed public benefit of the Thornburg campus? The companies pledged to "create 100-200 new permanent jobs."

That's unlikely, with Thornburg Mortgage now bankrupt. Does the city have recourse?

"No. Because we're not at risk. We haven't put out any money," City Attorney Frank Katz, who signed off on the bond, says.

Katz's predecessor, Dwyer, says the public doesn't care. "They don't want us to spend our time fighting with a mortgage company that's already failing over whether it's producing enough jobs," Dwyer says.

City Housing and Community Development Division Director Kathy McCormick agrees. "The real issue is, what are you trying to achieve?" she says. Now, she's focused on "pulling together the community."

The legalese in the deal states repeatedly—and in ALL CAPS—that the city is at NO RISK if Thornburg vacates the space. Thornburg spokesman Miller says that won't happen anyway and that the payments are up-to-date.

According to Heldmeyer, city officials feared for the health of the mortgage company even before the deal was struck—and kept those fears private.

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."


When Thornburg Mortgage laid off 130 of 150 employees, CEO Larry Goldstone called it a “difficult day.”

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

Online Only: Read SFR's extended interview with Eric Janzen in which the Author of The Post Catastrophe Economy discusses his thoughts on capitalism's boom-bust cycle and the rise and fall of what he calls the "FIRE economy."

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