"No Easy Workout"

That headline appeared above a photo of gym-goers working out on treadmills and stair masters at the soon-to-be foreclosed on Fayetteville Athletic Club, in a front page article about distressed debt in the business section of yesterday's New York Times. Apparently the business section's online editors don't have the same sense of humor, since the online version of the article eschews the clever pun of that headline and photo. Instead, the online version leads with this headline, "After the Bank Failure Comes the Debt Collector", and the photo above, of Fayetteville Athletic Club owners Robert and Katherine Shoulders.

The article notes that the Shoulderses borrowed $10 million from a local bank to renovate and expand their health club, and when that bank failed, they stopped paying their interest payments. Then Rick Williamson, "a Chicago banker turned junk-loan buyer", swooped in and bought the Shoulderses' loan at an FDIC auction for 34 cents on the dollar, and sued to foreclose on their property. One question raised, but not answered, by the article is why the Shoulderses didn't bid on their own loan at the FDIC auction (or have a friend do so). According to the article, the Shoulderses were willing to pay the FDIC $6 million upfront to forgive their loan -- so why not bid $4 or $5 million at the auction for their own loan (which Williamson bought for $3.4 million)? Williamson might have backed out then, and the Shoulderses wouldn't today be in danger of losing their business.

Also mentioned in the article was Andy Beal, the self-made billionaire and buyer of distressed debt who was the subject of a previous post here ("A Different Kind of Banker"):

The single biggest buyer at these [FDIC] auctions has been Andrew Beal, a banking billionaire from Texas who made his fortune buying distressed debt during the savings and loan crisis.

By the end of February, Mr. Beal had paid more than $200 million to buy $438 million worth of loans, according to agency records. Some of the loans came from the failed Arkansas bank.

Mr. Beal is hardly averse to risk. He is famous for trying (and failing) to build his own space satellite launch company, and for luring some of the world’s best poker players to a series of games, with him as a participant, and betting pots worth $2 million. Mr. Beal, in a telephone interview, said he went to great lengths not to push people out of their businesses, but at times he had no choice.

“Borrowers force us into litigation,” he said. “They don’t want to perform on their loan, they won’t talk to our workout people. What are we supposed to do, send them a vase of roses?”