When a group headed by the Fort Worth billionaire Robert M. Bass stepped in to buy the $30 billion American Savings and Loan Association of California, it stood as the most expensive rescue of a savings and loan association on record. After a decade which saw the savings and loan industry lose control over its lending practices as investors took excessive risks on inflated real estate, the sale was the first step in what became a mad rush of investors scooping up the troubled savings and loans, a chain of events which led to the modern notion of private equity real estate.
After American Savings filed for bankruptcy protection in 1988, a move that cost the federal government $1.7 billion, the Bass group paid approximately $550 million for the financial institution, though the amount of equity in the deal was reportedly around $150 million. In 1996, Bass' holding company, Keystone, sold American Savings for approximately $1.2 billion in stock to Washington Mutual, a move that created one of the largest thrifts in the US.
The American Savings deal also created something else: a belief that real estate investing in distressed assets could yield private equity-like returns, something which spurred the creation of private equity real estate funds when the Resolution Trust Corporation was formed in 1989.
“Those opportunities generated returns that allowed opportunity funds to be formed on a traditional private equity structure that historically wouldn't have been supported by real estate investment,” says one industry practitioner. “Suddenly opportunity funds were able to bring returns to the equation that justified private equity-like vehicles, and the Basses were the first in that capacity.”
The Bass group itself created many professionals who would go on to become some of the biggest players in the private equity and real estate world. Tom Barrack founded Los Angeles-based Colony Capital in 1991 after working as a principal investor for Bass. David Bonderman, the co-founder of Texas Pacific Group, spent 10 years with Bass investing in troubled savings and loans. And John Graykin, founder and chairman of Lone Star Funds, cut his teeth in the early 1990s with Bass buying up bad loans in the wake of the Savings and Loan crisis.