Troubled-Asset Buyer Sets Up Shop in District

Dallas-based Lone Star Funds, which specializes in acquiring distressed assets from troubled financial institutions, has established an operation in Washington so that it can help shape federal policy on taking over failed banks, officials at the private-equity firm said Friday.

Lone Star opened a downtown office last month. It has been working with the Federal Deposit Insurance Corp. as the agency devises new guidelines on the types of firms that will be qualified to acquire failed banks. Lone Star, which was launched in the wake of the savings and loan crisis in the late 1980s, manages eight funds with $24 billion, invested mainly in secured and unsecured corporate debt instruments, real estate assets and financial institutions.

"Being in Washington gives us the ability to work with federal agencies as they're working to resolve the crisis," Dan Magder, director of U.S. investments in Washington, said in an interview Friday.

Earlier this week, a Lone Star official sent a seven-page letter to FDIC Executive Secretary Robert E. Feldman offering comments on the agency's proposed qualifications for firms seeking to acquire the assets of failed banks. Len Allen, Lone Star's senior managing director, expressed opposition to an agency proposal that would require private-equity funds to put up more capital for such deals.

"The proposed policy uncovers strong bias against, and suspicion of, 'private' capital, seemingly aimed mainly at private equity funds," Allen said in the letter dated Monday. "We are not aware of any empirical evidence that private investors categorically present any greater risks to particular institutions or the banking system as a whole than 'traditional' investors."

Lone Star is not alone in pursuing distressed assets. Washington-based Carlyle Group, another private-equity firm, also has been investing in troubled banks. In May, a consortium of investors that included Carlyle and the Blackstone Group invested $900 million in a new institution that took over BankUnited from the FDIC.

During the savings and loan crisis, Lone Star acquired the assets of the Federal Savings and Loan Association, managing the institution under a partnership with the FDIC and the Resolution Trust Corporation, officials from the firm said.

Lone Star later acquired distressed banks in Germany, Japan and South Korea.

Last summer, Lone Star acquired the home-lending business from global commercial finance company CIT Group for $1.5 billion, agreeing to assume $4.4 billion of outstanding debt and other liabilities, CIT said. About that same time, Lone Star paid $6.7 billion to Merrill Lynch to obtain collateralized debt obligation in the form of home-equity loans, credit card accounts and other securities.