Banking: Liquidators for Guaranty Bank sue former owners

The action commenced yesterday by Kenneth Tepper, in his capacity as the liquidation trustee to the estate of the failed Guaranty Bank in the District Court for the Northern District of Texas, Dallas Division, alleges that the companies' directors participated in a scheme to fraudulently loot the bank and its direct parent company Guaranty Financial Group (GFG) of assets exceeding USD1,000 million, causing one of the largest financial institution failures in U.S. history.

Creditors supporting the action include HoldCo Advisors (sic) which manages more than USD50 million of debt issued by GFG. Major losses were sustained by FDIC and the US taxpayer, says the liquidator. Misha Zaitzeff of HoldCo Advisors, which manages some USD1,500 million of debt in financial institutions "in deep distress" says "Temple-Inland's flagrant disregard for fundamental estate and creditor rights must not go unpunished."

In 2004, the bank withdrew from the granting direct to consumers of mortgages. Instead, it focussed on asset-backed securities, some issued by government and some by banks. Such investment decisions have been criticised in other cases but have not been regarded as fraudulent.

However, the bank at the same time began to, in effect, finance purchases by the customers of its parent company and extensive loans were granted to construction companies in a move that, in effect, mirrored the creation of motor vehicle financing schemes by e.g. General Motors. In short, the group financed its own sales.

But, says Tepper, this "this was done at the direction of Temple-Inland to improve the bank's rates of return and to promote the homebuilding industry that the parent company served at the expense of GFG."

"The executives and directors of Temple-Inland and GFG acted with appalling self-interest at every step of their operation and spinoff of Guaranty Bank. The bank's investments became more and more risky and its capitalisation shrank to dangerous levels, all to the benefit of Temple-Inland's balance sheet and the detriment of Guaranty and its shareholders and creditors. The housing crisis was the final straw," said Tepper.

Koslov says that Temple-Inland "dumped toxic assets and other liabilities onto [the bank's] balance sheet - and then when it was doomed to fail, spun it off, leaving it to its fate.

But worse than that, says Tepper, in the six years' prior to failure, Temple-Inland took dividends amounting to some USD591 million - which amounted, it is alleged, to about 80% of GFG's nett earnings at the time. And as if that was not bad enough, "Temple-Inland weighed GFG down with a series of agreements in connection with the spinoff that contributed to the bank's desperate financial situation. These include a tax arrangement that cost Guaranty nearly $300 million in refunds and an aircraft-lease accord whereby the bank covered certain corporate aircraft costs," it says in the writ.

According to a Tepper, "In December 2007, Temple-Inland divested itself of GFG and the bank, spinning it off and removing Temple-Inland as a source of financial support. As a result of this long-running and multi-faceted scheme, Tepper alleges, the post-spinoff GFG was severely undercapitalized, insolvent and "doomed to fail." On 21 August, 2009, the bank failed with approximately usd1,300 billion in assets and USD1,200 Million in deposits, in the second largest bank collapse of 2009 and the tenth largest in U.S. history. It was taken over by the FDIC and its assets and deposits were sold."