Andy Beal’s road to becoming a billionaire, doing deals with the likes of Carl Icahn and Donald Trump, runs straight through the slums of Newark.

It was 1981, and Beal, then a 29-year-old vulture investor, was scoping out two 16-story apartment buildings owned by the Housing and Urban Development Department. The bricks were chipped and bulging off the exterior of the buildings. Tenants had pried open elevator doors and thrown furniture down the shafts.

Beal liked what he saw.

He and a partner bought the towers for $25,000 and a promise, backed by a $2.5 million letter of credit, to fix the bricks. They did the repairs — employing guards for protection when visiting the apartments — and never tapped the credit line before selling the buildings two years later to a doctor for $3.2 million.

In the past three decades, Beal has made a fortune buying distressed assets. He snapped up bonds of power companies during the California blackouts in 2001, debt backed by jetliners after the Sept. 11, 2001, terrorist attacks, and billions worth of commercial and real estate loans after global credit markets froze in 2008.

In between, the investor with a restless mind started a company to build rockets and beat a team of pros at Texas hold ’em in the world’s richest poker game.

Beal’s focus on beaten-down loans makes him look like a hedge-fund manager. He’s not; he’s a banker.

His Plano, Tex.-based company, Beal Financial, owns three banks. Deposits are insured by the Federal Deposit Insurance Corp. That means Beal raises money for his investments by promising, these days, to pay depositors just 1 percent a year. A small bank in New Mexico he bought in 2010 offers checking accounts. Otherwise, his 34 branches sell just savings accounts and certificates of deposit, which are less expensive to manage.

“It’s an FDIC-insured hedge fund,” says Sherrill Shaffer, a banking professor.

Unlike a hedge-fund manager, Beal doesn’t have to divvy up profit with investors. The banks controlled by Beal Financial have shareholder equity of $3.2 billion, according to the FDIC, and he owns the entire company.

A native of the manufacturing city of Lansing, Mich., Beal has collected an A-list of partners and friends. He’s pals with Trump, the loudmouthed developer. He talks history with Gabe Kaplan, creator and star of the 1970s sitcom “Welcome Back, Kotter.” He’s done business with Icahn, the corporate raider.

This year, Beal attended the wedding of friend Steve Wynn, the casino developer. Clint Eastwood was the best man.

Beal, who flies commercial and drives a Ford Excursion around Dallas, says he still reviews every deal his company does to make sure he’s not spending too much. These days, Beal is hitting the brakes because he sees a bubble inflating.

Stocks and corporate bonds have rallied because the U.S. government dumped money into the economy in the form of rock-bottom interest rates and imprudent deficit spending, Beal says.

‘He has 20/20 vision’

“Today’s markets are being supported by a flood of money,” he says. “There are so many lenders in a race to the bottom when things are good. We don’t participate in that.”

Trump, who borrowed at least $600 million from Beal’s banks during multiple bankruptcies by his casinos, says investors should heed the banker’s warning. “He has 20/20 vision into what is going to happen in the future,” Trump says.

At dinner with Kaplan in the back room of a Dallas steakhouse, Beal is upbeat. His wavy brown hair, blue eyes and chiseled features make the banker appear more like a West Texas rancher. He spars with Kaplan about Trump, who flirted with a run for the White House this year, saying the developer would make a good president simply because he’s not a politician.

Beal’s politics — he’s a self-declared libertarian — seem an odd fit for a banker who relies on federal guarantees to attract deposits. He loathes big government and gives money to politicians who vow to dismantle it. Until they do, he plans to avail himself of federal programs to make money just like the next guy.

“I don’t like the government-issued paper currency rules or the laws that require its use,” he says. “But those are the rules, and I live by them.”

In buying loans, Beal takes heftier risks with FDIC-insured money than do many bankers. Delinquent loans accounted for 21 percent of all loans at Las Vegas-based Beal Bank Nevada, the largest of his three banks, compared with an average of 5 percent for all U.S. banks as of March 31.

Taking bigger risks is legal as long as Beal abides by rules that prohibit banks from owning equity in nonfinancial companies or buying most debt rated as junk without dispensation from regulators.

Beal’s banks also must hold extra capital because they make riskier loans.

Beal Bank Nevada is stockpiled for Armageddon. It had $2.2 billion of equity capital at the end of 2010. Equity for a bank is the amount of assets — its outstanding loans — minus liabilities, or deposits. Beal Bank Nevada’s equity capital accounts for 35 percent of total assets, according to FDIC data. The average U.S. bank had an equity-to-asset ratio of just 11 percent at the end of 2010.

A numbers game

In addition to deposits, Beal collects Nascar race cars. He owns six of them, each with 800 horsepower. He and his friends drive the cars at the Texas Motor Speedway in Fort Worth, tearing around the track at 125 miles an hour.

A numbers nut, Beal once sat down to work on Fermat’s Last Theorem, the ne plus ultra of math geekery. In 1993, he came up with his own, related mind-bender, called the Beal Conjecture: If A^x + B^y = C^z, where A, B, C, X, Y and Z are positive integers and X, Y and Z are all greater than 2, then A, B and C must have a common prime factor. He still offers a $100,000 prize, through the American Mathematical Society, for proving or disproving it.

Beal’s profitable trades have produced almost off-the-charts results compared with other banks. Beal Bank Nevada had a return on equity of 27.4 percent in 2010 versus an average of 5.9 percent for all U.S. banks, according to the FDIC. Beal says he succeeds because he does his homework and always buys loans that have collateral that he can get if the borrower defaults.

Beal gets most of his deposits not from moms and pops who walk into his branches to open accounts, but from Wall Street firms. They raise money from investors who want FDIC protection, and then sell to banks, like Beal’s, that offer the best rates. Banks insure individual accounts to $250,000 each.

The brokered deposits are regulated by the FDIC because they worsened the savings-and-loan crisis in the mid-1980s. Many S&Ls offered high interest rates to get the deposits quickly, then invested them in risky assets to pay the promised rates and make a return. After many of the investments failed, the industry required a $124 billion taxpayer bailout, mostly by the Resolution Trust Corp.

To curb such reckless lending, Congress in 1991 passed a law requiring banks using brokered deposits to hold more capital.

The requirements are worth it right now for bankers, says Paul Clark, a lawyer who specializes in law related to the deposits. Banks aren’t lending aggressively, so there is less demand for assets, and banks pay less for them. “Brokered deposits are the best deal around,” Clark says.

Beal is building out his branch network to wean his reliance on brokers. In mid-June, Beal was paying 1.01 percent for a 12-month CD, compared with 0.5 percent for Bank of America. Beal says he expects rates to increase, and by gathering more deposits directly from customers at branches, he’ll be able to better manage his costs of acquiring capital.

Beal also mines cheap money from the Federal Home Loan Bank of Dallas. It’s one of the 12 private cooperatives set up in 1932 to encourage lending for housing and development. The FHLBs have the backing of the U.S. government, meaning that investors expect that the Feds won’t let them fail, just as the government took over Fannie Mae and Freddie Mac in 2008 rather than let them collapse.

A ‘hedge fund’ backed by banks

FHLB members, such as Beal’s banks, buy stock in the FHLBs and get the right to borrow against their own loans and other assets. As of Dec. 31, Beal Bank Nevada had advances of $1.4 billion from the Dallas FHLB, making it the third-largest borrower, after Wells Fargo and Comerica, according to a 2010 government filing from the Dallas FHLB.

Beal’s banks pay millions in dividends each year to his holding company. They shelled out $244 million in 2010 and $220 million in 2009, according to records submitted to the FDIC. In 2004, Beal says, Beal Bank SSB in Texas alone paid out $1.3 billion to start Beal Bank Nevada.

Beal could get richer if he got out of banking with its costly regulations and formed a hedge fund, says Tim Yeager, associate professor at the University of Arkansas at Fayetteville. “He’s paying nothing on deposits and making extremely high returns on assets,” Yeager says. “But he could make more money, I promise you, by not being a bank.”

Beal toyed with the idea, starting an affiliate called CLG Hedge Fund. Beal says he put Hedge Fund in the name because he wanted its employees to think like hedge-fund managers, buying and making higher-yielding loans.

CLG never actually operated as a hedge fund, partly because Beal didn’t want to share his returns. “Interfacing with regulators is one thing,” Beal says. “Taking calls constantly from various investors is intolerable. Also, why split profits?”

Former Beal employees criticize his management style, saying he treats people like assets, moving them quickly in and out to keep costs down.

Total employment at Beal Bank and Beal Bank Nevada fell 29 percent to 511 in 2010 from 722 at the end of 2009. Most of the decline, Beal says, came from closing his loan-servicing operation.

Beal says he pays plenty. “Jobs paying $200,000 just don’t grow on trees, except in New York,” he says.

The gambler

Beal attended Michigan State University. He made frequent trips to Las Vegas to play blackjack and kept getting kicked out of casinos for counting cards.

In 1976, Beal says, he bought his first HUD apartment building, sight unseen, for $217,500 in Waco, Tex. The city wanted him to put up a $300,000 bond guaranteeing that he would keep renting only to low-income tenants. Clifton Robinson owned an insurance company in town and agreed to put up the bond.

Beal and Robinson partnered five years later to buy the two Newark apartment buildings and then trolled blighted parts of New York looking at properties that HUD wanted to give away to people who would maintain them, Robinson says. They paid a cabbie $500 a day to take them around the South Bronx. The duo didn’t buy anything. “It looked like Berlin in 1945,” Robinson says.

Beal used his profit on the Newark towers to open Beal Bank in 1988. It was the middle of the S&L crisis, and the investor started buying loans at a discount from RTC, which was disposing of the debt recovered from failed thrifts.

The banker started buying the airplane paper on Sept. 24, 2001, making one trade at 38 cents on the dollar. Most were done at 60 cents to 80 cents. He never had a loss.

That year, Beal had begun playing Texas hold ’em in Las Vegas against a group of professionals who pooled their resources so they could match the banker’s purse. He honed his skills by competing against the pros, often losing millions, according to a book called “The Professor, the Banker and the Suicide King,” by Michael Craig.

In May 2004, he played what Craig — and Beal — say was the richest game of poker ever, at the Bellagio casino. The minimum bet was $100,000.

Beal showed up in sunglasses to hide his eyes and earphones to eliminate distraction. The banker played five pros over two days, winning $10.6 million.

Six months later, Beal made a much bigger wager on gambling. Trump Hotels & Casino Resorts, then the owner of the Trump Taj Mahal in Atlantic City, N.J., and three other casinos, went bankrupt in November 2004. Beal stumped up $100 million in a debtor-in-possession loan shortly after, becoming first in line for any repayment when the company reorganized, as is the case for DIP lenders. Beal says he made money on the loan.

Betting bigger

Beal took an even larger risk on Trump in 2007, loaning the new company, Trump Entertainment Resorts, $500 million. The company lost money in three of the previous four quarters. Just 14 months later, Trump Entertainment sought protection from creditors. As usual, Beal was first in line to get paid or claim collateral.

Trump and Beal then teamed up on a plan to reorganize the company, competing with a group of bondholders led by Avenue Capital Group and its chief executive, Marc Lasry. They filed their plan that August, proposing to invest $100 million in the casinos. Beal said he would restructure the $486 million that the company still owed, giving it more time to pay.

In November 2009, Trump stopped working with Beal and joined Lasry’s bid. Lasry had agreed to let him take as much as a 10 percent stake in the post-bankruptcy company in exchange for use of the Trump name, according to regulatory filings by Trump Entertainment. Beal later sold the loan to Icahn for 92.5 cents on the dollar. Beal says he made money at that price because he had collected enough interest on the loan to more than cover the discount he gave Icahn, who was repaid in cash and new bonds, according to filings.

For a bargain hunter like Beal, 2008 and 2009 were bumper years. While hedge funds dumped assets, any assets, to raise money for panicked investors, and banks stopped lending to stanch losses, Beal went shopping. He brought in hundreds of analysts and other employees to sift through mortgage bonds and other debt that had plunged in value.

Beal says he spent $5 billion on these loans and other assets in a year.

“I wish we’d done twice as much,” Beal says. “The sky was falling. We thought it would get cheaper.”

Instead, the government stepped in and stopped the panic, shoveling taxpayer dollars into the markets via the Fed and Treasury. Asset prices rose. Beal stopped his spending spree and cut workers.

Another boom at Beal Financial was over. He bought enough to make another fortune, though. Net income at Beal’s banks soared to $559 million in 2009 from $281 million in 2008. Citigroup, by contrast, lost $1.6 billion in 2009.

A full version of this story appears in the August edition of Bloomberg Markets magazine.