He did it first at Rothschild, and since 2000 at his own investment fund, WL Ross & Co. To cite just one example, Ross bought bankrupt steelmaker LTV for $325 million in 2002, and sold it for $4.5 billion two years later.
As the economy continues to struggle, Fortune's Katie Benner sat down with the master of distressed investing to hear where prospects can be found in this turbulent time.
Where do you think the biggest opportunities are now?
There are deep value opportunities in insurance stocks, which were beaten down because of their exposure to the subprime crisis, annuities, and commercial real estate. I won't name names, but some well-managed life insurance and fire and casualty companies will come through this stronger. They used to trade at one or two times book value but now trade at three-quarters book.
Regional and subregional banks still have a lot of issues to resolve, and they have enough commercial real estate assets on their books to make most of them insolvent on a mark-to-market basis. Of course, they won't all mark their assets to market and their loans won't all go bad. But another several hundred banks will fail before we get through this cycle. We just bought Bank United in Florida for $925 million, and the FDIC is providing about $4.9 billion in assistance.
I still like TIPS (Treasury inflation-protected securities), and I think a big opportunity is coming in the municipal bond market. Even if it doesn't default, some state or local government will come close enough to scare everyone to death. That will be a wonderful buying opportunity.
And as one of the public-private investment managers for the Treasury, we have been buying lots of residential mortgage-backed securities. The price often more than discounts the problems that are ahead. After another year or so of property value declines I think that market will stabilize along with the securitization market. Securitization is a fundamentally sound idea, even if it was poorly executed.
How can we fix the securitization market?
No one had skin in the game. That's where things went wrong. My proposal then is that everyone has skin in the game. Ratings agencies' fees and compensation should be paid over time and depend on the enduring quality of the rating. Employees at banks and brokerages should have their compensation tied to the long-term success of their products. If a trader is paid a big bonus for a portfolio that turns out to be a disaster a year later, did he really earn the money he was paid?
What about commercial real estate? There are reports that you want to buy the near-bankrupt apartment complex Peter Cooper Village/Stuyvesant Town in New York City.
At some point commercial real estate will become very interesting, but not yet. The declines in value are not over. Stuyvesant Town is an early indicator of what's to come -- it's a poster child for the mistakes made during the boom -- and we are interested in it.
In the original deal for the complex, the financing was predicated on the idea that the apartments would no longer fall under rent control and that they would start generating a lot more cash. That never happened.
There were also 11 tiers of mezzanine debt on the complex, which probably have no value. The debt was distributed into six or so commercial mortgage-backed securities that were sliced up and sold to investors.
So there's a huge pile of paper out there that is very affected by this deal. At some point these securities will fall in value enough to be attractive. But at the moment the prices don't reflect the problem environment that we see.
What is the investment opportunity at Stuyvesant Town if you can't significantly raise rents?
Eleven thousand middle-class families live in Stuyvesant Town -- more than in a small town. New York City needs affordable, middle-class housing. If the debt put on the complex is the right size for the amount of cash the complex generates it could be a very good investment.
How do you see 2010?
This is going to be a volatile year. It won't be a year of stock markets, but of the individual stock. Some will do very well, despite the environment.
What are the big challenges for investors now?
Government intervention is one. Washington, D.C. is the new Wall Street. No significant financial transaction of any consequence occurs without it. About 90% of all mortgages are granted through Washington.
Health-care reform would mean another 16% of the economy under more government supervision.
But there is no evidence that more regulation makes things better. The most highly regulated industry in America is commercial banking, and that didn't save those institutions from making terrible decisions.
The relationship between information and decision-making is a challenge. Everyone gets the same information at basically the same time, so the value of information has gone to zero. And there has not been proportionate growth in the investment community's ability to sort through it all. People spend so much time absorbing that they don't have time to understand what it means. This creates volatility.
For example, people suddenly decide Greece is the problem, and whack, the market is down 10%. If weeks from now people decide California is the problem, markets will move again. Everyone has known for over a year that both places are troubled. Why do we care now? How do we know that the problems of Greece or rescuing that country will make a difference in the economic landscape one way or the other?
That's why the value of expertise and the ability to interpret information will someday go to infinity.
