Leadership Overhaul Looms for Fremont

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Editor’s Note:

The online version of this story has been corrected in paragraph five to update the figure for reserves held by the lender to cover bad loans. That figure is $481 million.


Fremont General Corp., the beleaguered Santa Monica-based lender that was forced to unload its subprime mortgage lending business and has been operating under government restrictions, is set to announce a major management shakeup and release a crucial earnings statement this week.


Under the management restructuring required in a federal order issued last March, current Chief Executive Louis Rampino and Chief Operating Officer Wayne Bailey are expected to step down in favor of a new management team. These changes prompted Fremont last week to take the unusual step of indefinitely postponing its annual meeting from Dec. 13.


Also, Fremont is expected to release its third quarter earnings on Nov. 9, a crucial milestone as the company seeks to recover from $856 million in losses incurred during the first half of 2007 as a result of the subprime mortgage meltdown.


These steps come in the wake of a failed rescue attempt by Texas billionaire Gerald J. Ford that would have provided $80 million in additional capital for Fremont’s main operating unit, Brea-based Fremont Investment & Loan Co. The agreement was announced in May but had been on the ropes for weeks before discussions broke down completely on Oct. 30.


Company representatives have indicated that Fremont’s July 2 sale of its $6.3 billion commercial real estate lending business to iStar Financial Inc. for $1.9 billion in cash plus an interest in the remaining portion will reflect in an improvement in its balance sheets. As of June 30, the last date for which figures are publicly available, Fremont was out of compliance with a federal order to maintain a 14 percent ratio of capital to assets (it had a ratio of 5.2 percent). The company’s most recent regulatory filings say it has $481 million in reserves to handle any bad loans that the company has not been able to sell.


An improvement in combination with the management change may convince federal and state regulators to lift or alter their “cease and desist” orders they issued against Fremont earlier this year, but that’s not certain.


“Essentially, Fremont has faced three choices: raise capital, sell all or pieces of itself or get shut down,” said Wade Francis, president of Unicon Financial Services, a Long Beach-based banking consultancy.


Fremont spokespeople said the second quarter numbers didn’t reflect the company’s current financial condition because developments since then have substantially altered the bank’s standing.


A spokesman for the company e-mailed a statement that said:


“A four-month-old second quarter balance sheet does not reflect the effect of subsequent developments on the company’s financial position, such as the close of the iStar transaction on July 2. Neither our investors nor our customers should draw any conclusions about the company’s current financial state until third quarter financials are reported.”


Francis agreed, adding that regulators will be closely watching Fremont’s financials and the new management team that Fremont is expected to name within the next 10 days.


One person with knowledge of Fremont, who asked to remain anonymous, said that as long as Fremont makes progress towards the 14 percent capital ratio and puts a management team in that starts taking corrective actions, it is not likely regulators will bring severe penalties. “They want to see things moving in the right direction, even if every condition of the cease-and-desist order isn’t met 100 percent,” the person said.



Subprime woes

Fremont’s current round of difficulties began with the collapse of the subprime market earlier this year. Lenders had made huge volumes of loans to borrowers with marginal credit. During the residential real estate boom the continual run-up in home values had made these loans hot commodities.


But starting nearly two years ago, home price appreciation slowed and foreclosures began to mount. Buyback clauses in these loan sales to investors meant that lenders had to put out hundreds of millions of dollars for repurchases. Fremont paid $238 million in the second quarter of 2006 to buy back subprime loans.


This past winter, another crisis hit as investors stopped buying loan packages with subprime mortgages in them. As a result, Fremont stock closed at $2.47 per share on Nov. 1, off 85 percent for the year.


The Federal Deposit Insurance Corp. stepped in on March 7 with the cease and desist order that required Fremont to come up with a plan to restore its capital adequacy, setting an unusually high ratio of 14 percent for capital to total assets. Banks in normal circumstances are generally regarded as adequately capitalized at 6 percent to total assets. Capital essentially is the amount of money that a bank can call its own.


The FDIC order also stated that Fremont Investment & Loan was “operating with management whose policies and practices are detrimental to the bank,” and required Fremont to “retain qualified management” acceptable to the FDIC and to the California Department of Financial Institutions.


Fremont immediately moved to sell $4 billion worth of its subprime loan portfolio in a series of installments, leaving it with the still-profitable commercial loan portfolio and its 22-branch retail banking operation.


In order to improve its capital ratio, Fremont chose to embark on two simultaneous tracks: selling more assets and seeking a capital infusion. The May 21 announcement of the agreement with Ford would have resulted in an injection of capital, while the July 2 announcement of the sale to iStar further reduced its asset size.


But by late summer, the agreement with Ford began to unravel. Fremont officials would not comment on the reasons for this, while an assistant to Ford said he was not available for comment.


In the meantime, two hedge funds last month announced substantial stakes in Fremont General: Fort Worth-based Amalgamated Gadget LP and New York-based Harbinger Capital Partners disclosed stakes of 8.3 percent and 9 percent respectively.


On Oct. 23, Fremont General adopted a shareholder rights plan to preserve net operating loss carry forward tax benefits. The plan includes limits on the amount of stock that a single person or entity could purchase. A company spokesman said that was done to prevent what could be seen as a change in ownership, which could void the tax benefits.


The banking consultants said that if Fremont shows substantial improvement in its third quarter financials and if its new management team restores investor confidence, Fremont could have an easier time attracting more investment. One consultant even suggested that it was possible that Ford could re-enter the picture.


But Fremont still has a long road before it can turn the page on the current crisis. As long as the cease and desist orders remain in effect, Fremont will face strict milestones that it must meet, including the crafting of a new business plan. Its ability to expand will also be limited until the orders are lifted. Also, any sale of the company’s remaining assets must be approved by the FDIC and the state banking regulator.


“The real key to the company’s future is getting out from under the cease and desist orders,” Francis said.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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