For Gerald J. Ford, buyout specialist, flipping banks has been good business

Gerald J. Ford has something he wants to show off. He jumps into a golf cart and races toward one of the 11 barns on his lush, 1,000-acre Kentucky thoroughbred farm. He speeds past tall sycamore trees, painted lawn jockeys and manicured fields of grass glistening from the May morning dew.

Ford stables more than 100 horses here, including broodmares he breeds with his prized Pleasantly Perfect, winner of the $6 million Dubai World Cup.

“We’re going to see the babies,” says Ford, wearing a cap, khakis and hiking boots as he walks into the foaling barn.

Inside, Pleasantly Perfect’s latest offspring — a 120-pound chestnut foal born the night before — quivers next to its mother.

“I love being out here,” says Ford, whose slight drawl reveals his roots in the Texas Panhandle.

Ford, 68, will probably sell the foal, much as he did the banks and savings and loans that he flipped to make himself a billionaire. These days, he spends most of his time in Dallas at his primary operating company, Diamond A Ford, which he named after the cattle brand from his New Mexico ranch.

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Four years after the worst financial crisis in decades claimed Bear Stearns and Lehman Brothers, Ford is nowhere near done buying and consolidating healthy and distressed banks. While the largest U.S. firms repaid their bailouts to the $700 billion Troubled Assets Relief Program, more than 400 smaller ones, unable to raise new capital, are struggling to do so, according to Christy Romero, TARP’s special inspector general.

“There are 7,000 banks out there, and a big number of them still have outstanding TARP preferred stock,” says Ford, who’s not related to the late U.S. president or the auto clan. “Somewhere in there is another opportunity to recapitalize a bank. We’ve bought banks for 37 years. Except from 2002 to 2010, we never went three years without buying a bank.”

The buyout business

The buyout business has been hugely profitable for Ford. In March, he sold Pacific Capital Bancorp, parent of Santa Barbara Bank & Trust, to Japanese-controlled UnionBanCal for $1.5 billion, three times his initial investment of $500 million.

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In August 2010, Ford took over Pacific Capital, which was made up of five banks with a combined $5.8 billion in assets. Because of soured residential construction loans, Pacific Capital hadn’t posted a profit since the beginning of 2008. It owed $181 million to TARP.

In following its cost-cutting playbook, Ford’s team took out $177 million in expenses by merging the back-office operations of the five banks, firing 181 employees and closing five branches. It also wrote down $485 million in bad loans.

“When a bank gets in trouble, it’s just swimming against the current,” says Carl Webb, Ford’s second in command at Diamond A Ford. “We call them the walking wounded. That’s where we see the opportunity going forward.”

By sticking to this formula, Ford, the son of an auto body shop owner, has amassed about $1.3 billion, according to data compiled by Bloomberg. He has five homes, in Dallas; Southampton, N.Y.; Manhattan; New Mexico; and Kentucky. Along with thoroughbreds, he has also bought historic saddles, including one given in 1864 to Archduke Ferdinand Maximilian Joseph of Austria by Mexico, where he briefly served as emperor. Ford paid $230,000 for it.

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During the past decade, as private-equity rock stars such as Henry Kravis and Stephen Schwarzman made megadeals for brand names, Ford avoided splashy buyouts. He has operated quietly, mostly in dusty backwaters such as Levelland, Tex., and Carrizozo, N.M.

‘I wanted to run something’

Ford earned an undergraduate economics degree at Southern Methodist University and got his law degree there in 1969 because, he says, he saw that the prosperous people wearing ties in his small town were lawyers.

After working as a general counsel for a group of closely held corporations, Ford decided he wanted to be his own boss and build his own company. So, at age 31, with two partners and some borrowed money, he paid $1.2 million for 64 percent of First National Bank of Post, Tex., in 1975.

“I wanted to run something, a business,” Ford says. “After we got it, one was good, two were better.”

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Seven years later, Ford bought First National Bank in Lubbock, Tex., and hired Webb to be president. The two men then went on a three-decade shopping spree. They have taken a conservative approach to buying troubled banks, scrutinizing customer loyalty and defaults to limit their risk.

They avoid firms that have lost more than 10 to 15 percent of deposits. They also shun buyouts if they expect defaults to rise to the point that they eat into potential returns.

“Banks get in trouble for one reason,” Webb says. “They make bad loans.”

Over the years, Ford has snapped up almost 60 small firms, using his own money, capital from partners and a $500 million private-equity fund.

Ford, a hands-on dealmaker, and Webb, 62, who manages operations, do these buyouts with the support of 12 employees at their headquarters in Dallas. They have at times been backed by large federal subsidies, which has stirred protests from lawmakers.

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“Carl is the stingiest son of a gun you would ever meet,” says Thomas Brown, whose Second Curve Capital hedge fund has invested in Ford’s banking deals. “They operate a low-cost model.”

Ford endeavors to make money — even small amounts — in almost everything he does. As much as he loves his foals in Kentucky, he auctions them for up to several hundred thousand dollars apiece.

Another of Ford’s favorite escapes is his 147,000-acre ranch, where he raises a herd of 3,500 cattle for market and also sells hunting trips. A three-day excursion for trophy elk goes for $9,000, and a mule deer hunt costs $3,300.

Ford also has a 188-foot yacht that he co-owned with billionaire Ronald Perelman before buying out his friend’s share. “He got the greatest bargain of all time from me,” Perelman says. When Ford isn’t yachting, he leases the boat for as much as $420,000 a week.

Ford says that working in an auto body shop as a teenager alongside his dad spurred him to seek a better career. Now approaching his eighth decade, Ford says he has no plans to retire. “I have been paid handsomely for a job I love,” he says.

The full version of this Bloomberg Markets story appears in the September issue.

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