If you want a stark example of the kind of lending practices that created the global credit crisis, you can hardly do better than banking giant Credit Suisse's adventures in luxury mountain resort financing. At Tamarack in Idaho, at Promontory in Utah, and at the Yellowstone Club in Montana (to name just the few that I'm most familiar with) the bank doled out hundreds of millions in loans, which were than syndicated out to investors (just like those famous sub-prime mortgages). If the Yellowstone Club situation is typical, those loans were made with minimal due-diligence or oversight, and no plan for what might happen if the real estate market hit the skids.
The Yellowstone Club owes Credit Suisse (or rather its unfortunate clients) $307 million, and I'd say there's a better than even chance that only a fraction of that will ever get paid back. If you'd been wondering what the "toxic assets" that are of such concern to the Treasury Department and the Federal Reserve actually consist of — and why they threaten the solvency of the entire banking system — there's one answer.
The level of recklessness in Credit Suisse's resort lending — and sources say it did more than dozen similar resort loan deals in the U.S. and overseas — is only now becoming clear. Even if you take the most charitable view, much of Credit Suisse's Yellowstone Club loan financed exceptionally wasteful spending by the club and its owners, as well as a dubious scheme to develop a super-luxury vacation time-share operation called the Yellowstone World Club. Any busboy in Big Sky could have told Credit Suisse that its money was being squandered.
At Tamarack in Idaho, the situation is a little less scandalous, but similarly dire. The resort is now operating under a receivership, and is probably just a bad snow season away from total insolvency. One way or another it will probably survive, but you definitely wouldn't want to be holding a $270 million note. Promontory, in Utah, is also staying open while in Chapter 11 proceedings, but as with its brethren, the financial model (and repayment of $275 million) depends on a real estate recovery that looks distant indeed.
It's now conventional wisdom that the financial industry's risk-assessment methods were fatally flawed because they understated the probability of a dramatic shock to the system — like, for example, a 30 percent fall in real estate prices. And Credit Suisse was hardly alone in its follies: Lehman Bros., for example, lavished $170 million on the Yellowstone Club's Big Sky neighbor, Moonlight Basin. (We know how the Lehman part of that ended, and the Moonlight Basin part is still to be determined). Financial institutions of all stripes, looking to meet investor demand for loan products in the easy-money days of the 2002-2006, thought they could spread the risk by slicing the loans up into investment instruments (often collateralized debt obligations, or CDOs) that in some cases could then themselves be insured against default (via credit default swaps). Nobody thought too much about what might happen if underlying asset values collapsed across the board.
Yet all it took was a common-sense look at a resort market like Big Sky, where prices tripled from 2003 to 2007, to suspect that the buying frenzy wasn't going to last. Credit Suisse only had to analyze its own portfolio to recognize that there was an awful lot of supply of multi-million-dollar mountain homes coming online.
And even if you accept the "everyone was doing it" defense, it still seems amazing that an institution like Credit Suisse, with access to the best legal and financial minds in the world, apparently had nothing remotely resembling a Plan B for these projects. For a while I wondered what the bank's strategy might be as the loans defaulted: Did Credit Suisse think there was long-term upside, in which case it would be looking to own and operate the properties for a while? Or was it just aiming to get whatever it could as quickly as possible, even if that meant big losses?
From watching the proceedings in the Yellowstone Club bankruptcy, I think it's now safe to say there was no strategy at all. First, Credit Suisse stood by while the club slipped into Chapter 11 in the first place. Then, it came forward with a $4.4 million debtor-in-possession financing that would last about three weeks, with no clear indication of what it planned to do then. When "then" arrived, about 10 days ago, Credit Suisse first said it would offer a few more weeks of funding, then said it couldn't even raise the money for that, then proposed floating things for a week so it could shut the club and sell the assets.
The bankruptcy judge, not surprisingly, decided that was a pretty dumb plan, and approved a $25 million interim financing from CrossHarbor Capital Partners. (A liquidation plan involving the shut-down of the club would almost certainly destroy much of its remaining value). In fact, the restructuring specialist that Credit Suisse installed as part of the three-week loan deal actually testified against the bank's proposed new interim financing plan. That has to be pretty rare.
The Credit Suisse lawyer, from Skadden Arps, has certainly been dancing energetically in the courtroom; top-dollar lawyers are evidently something the bank can still afford. But its apparent lack of attention to how it might rescue a series of loans that total in the billions is baffling. A cynic would say that since Credit Suisse doesn't actually hold most of the paper, it's just in it for the fees anyway, and therefore the more running in circles, the better. I'm not that cynical: I think it's just incompetence.