As Mortgage Mess Unravels, Some Investors Clean Up

29 08 2007

 By Thomas Heath and David Cho

Washington Post Staff Writers
Tuesday, August 28, 2007; Page D01

Joe Robert watched his real estate investment firm’s stock tumble to five-year lows this month as Wall Street punished any company linked to the mortgage mess. But where others panicked, Robert saw opportunity. From Aug. 9 to 16, he scooped up about $8 million worth of his firm’s shares. They have since risen about 25 percent.

“We are in,” Robert said of the buying opportunities created by the battered markets.

Robert, chairman and chief executive of J.E. Robert Cos. in McLean, has a knack for making fortunes off market pullbacks. “The market is oversold. . . . This is typical of any kind of financial crisis, credit crisis, real estate recession — whatever you want to call it.”

The biggest names in American capitalism — from bankruptcy whiz Wilbur Ross to Bank of America — are finding cut-rate deals within the widespread financial misery that began when record numbers of homeowners defaulted on their mortgages.

Investment-savvy billionaires snatched up high-quality bonds and stocks on the very days when most traders were furiously selling. Now those investors are enjoying big gains as the market gradually recovers from a 10 percent drop. Some fund managers think they can even make money in high-risk mortgage products, which Wall Street blames for bringing down the credit markets, which hurt the stock market and called the health of the economy into question.

Alternately known as “vultures” and “bottom-feeders,” these value investors serve a critical role by ruthlessly sorting the worthy from the worthless. They are often the bellwethers that let everyone else know it is safe to come back into the markets.

Last week, Bank of America bought $2 billion worth of severely discounted shares in Countrywide Financial, the nation’s largest mortgage company. Ross, who made fortunes buying steel companies when Wall Street had left the industry for dead, is jumping into bonds backed by the now-infamous subprime mortgages. Big hedge funds and private-equity firms as well as Pacific Investment Management Co., or PIMCO, the world’s largest bond fund, are building war chests and sifting through the rubble in the mortgage industry for bargains.

Bargain-hunting during a market panic comes with a lot of risk. These investors at times are betting billions of dollars that the situation won’t get worse. But some of the greatest fortunes in history were made when risk-takers bet against the prevailing wisdom and bought assets when others were selling.

“People who are willing to look carefully . . . are going to make money,” said Bruce Greenwald, a professor at Columbia Business School who specializes in value investing.

Data from Thomson Financial, an independent research firm, show that bargain-hunters began in early to mid-August to sort through some of the hardest-hit segments of the credit markets, including high-yield corporate bonds, where new or struggling companies go to borrow money. That was the same period that the Dow Jones industrial average dropped below 13,000.

“Even before people were saying the sky is falling, we had savvy investors coming in and purchasing select [corporate bond] issuances,” said Frank Scaturro, vice president of Thomson Financial Corporate Advisory Services. “This will be seen as a great buying opportunity for years to come if you are able to make an astute investment.”

Robert, who made his fortune resurrecting distressed companies during the savings-and-loan crisis in the early 1990s, said he was looking for deals with the same enthusiasm he had two decades ago. He is betting on stocks and bonds of real estate companies and buying office buildings that he thinks are mispriced in the current panic.

“I think there are very interesting opportunities in the debt markets,” Robert said. “My own belief is that the value of any commercial real estate today is 10 percent less than it was six months ago. The question is how long it takes people to realize that.”

William Walton, chairman of Allied Capital, a business development company in the District, said his firm was preparing to jump into the fray to take advantage of the drop in the corporate debt markets.

“We are looking at creating new debt products to take advantage of the fact that the banks pulled back in the last month or so,” Walton said.

No big investor may have done better than Bank of America. The bank’s $2 billion investment in Countrywide is already up $220 million on paper. If Bank of America chooses to convert that into Countrywide stock, it could become Countrywide’s largest shareholder, with a 17 percent stake.

“It was a situation where we went out and looked and felt that there was more value there than the market was giving credit for in the form of [Countrywide’s] stock price,” said Robert Stickler, a senior vice president of Bank of America, which is headquartered in Charlotte. “That was the primary motivation — to make a good investment for our shareholders. In times like this, people who have capital and liquidity are in the best position to do things.”

Warren Buffett, the legendary investor who has $50 billion in cash to invest, has Wall Street abuzz over his next moves. Buffett, who sits on the board of The Washington Post Co., declined to comment, but he has said that market dislocation such as the one caused by recent upheaval in mortgages creates real opportunities.

“Panics like these create standard, good old-fashioned runs on the bank, and the bad apples spoil the good ones. And you can get good deals,” said Christopher Thornberg, a principal at Beacon Economics, which does regional economic forecasting. “You have Warren Buffett out there sniffing around because they are looking for good companies that have been tainted by the bad apples.”




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