RICK KARR: Jesse Morreale has a lot of experience buying run-down buildings in edgy neighborhoods, fixing them up, and opening bars, restaurants and clubs in them. It’s his business model and his passion.
JESSE MORREALE: I see, for instance, a building like this as an opportunity to contribute something to the community in addition to myself. As the businesses around me are growing and being more successful, my businesses are more successful. This is basic economics.
RICK KARR: Morreale’s been lauded by the City of Denver for helping to revive a few neighborhoods there. He started out rehabbing old theaters when he was a concert promoter. That’s when I first interviewed him. He bought this building in 2008 and opened a couple of restaurants on the ground floor. He dreamed of converting the upper floors into a luxury hotel. But as the restaurants started to attract crowds the hotel project ran into trouble with city inspectors and his business plan derailed.
RICK KARR: Your company was wounded, but was it a mortal wound, in your opinion?
JESSE MORREALE: Absolutely not. It was a distress period. Manageable issues, curable issues.
RICK KARR: One reason Morreale was optimistic was the relationship he had with his bank. FirsTier Bank had provided most of the financing for the hotel. It was small, so its top executives got involved and it was local, so they knew the area. The bank gave him millions of dollars in loans. He gave the bank all of his business: credit card transactions, checking accounts, everything. Morreale thought of his bankers almost like they were his partners.
JESSE MORREALE: If we had a cash flow problem, I would go and talk to the bank president, right? And they would be accommodating to that because they had a vested interest in making sure that the small business and their customer was successful.
GEORGE BAILEY “IT’S A WONDERFUL LIFE”: Remember last year when things weren’t going so well and you couldn’t make your payments? Well, you didn’t lose your house, did you? You think Potter would have let you keep it?”
RICK KARR: It was the way George Bailey did business in the film “It’s a Wonderful Life”- old-fashioned, personal banking. So when Morreale went to FirsTier to talk about a loan modification, to defer payments for a few months so he could take care of the building problem and get the business back on track, the bank had incentives to be flexible. At least it did until the financial crisis hit and FirsTier Bank failed. Hundreds of banks went under during the financial crisis and of business owners like Jesse Morreale lost the bankers they’d been doing business with in some cases for years. They found themselves dealing with strangers who didn’t have a vested interest in making sure they were successful.
RICK KARR: On a Friday night in January of 2011, Morreale learned that regulators had shut down FirsTier, and the Federal Deposit Insurance Corporation had taken over.
JESSE MORREALE: And from that day on, it was a nightmare. And for a while we had employees who couldn’t cash their paychecks. It was a mess.
RICK KARR: Meanwhile, Morreale was getting letters about the loan for the hotel project from the FDIC and others – each one left him with a different impression of who was in charge of the loan he had been trying to modify.
JESSE MORREALE: We didn’t know who to write the checks to. They changed the addresses you sent them to. They change everything. And each and every time we would have to go through this fire drill with getting things like insurance certificates changed to reflect these new people. And each time that would cost us money.
RICK KARR: By now the FDIC was trying to figure out what to do with FirsTier’s assets, including Morreale’s loan.
BRET EDWARDS: We have a statutory obligation to maximize the value of these assets.
RICK KARR: Bret Edwards runs the FDIC’s division that handles the assets of failed banks. He says because there were so many loans to handle during the crisis and to try to maximize what the agency could get for them, he and his team turned to the private sector, including hedge funds and real estate firms. They became the FDIC’s partners on more than twenty-six billion dollars worth of loans. The agency and the firms split the money that comes in from the loans. The firms also get paid management fees because they collect payments, chase down deadbeats, and deal with modification requests like Morreale’s.
BRET EDWARDS: We are trying to get out of their way so that they can do what they’re best at doing.
RICK KARR: A firm called Sabal Financial is one of the FDIC’s partners in Jesse Morreale’s loan. CEO Pat Jackson says his firm doesn’t do business like a bank.
PAT JACKSON: I don’t have a regulator looking over my shoulder saying, “Hey, you’ve gotta do it this way or that way or this way.”
RICK KARR: Does that mean that you can be a little bit more aggressive with borrowers than a bank, a regulated bank could?
PAT JACKSON: Banks in general still look at their borrowers that, “I have a relationship. I’m a community bank.” And they take a different point of view about collections than perhaps we would. We’re simply looking at the value of the collateral, the ability of the borrower to pay, and that’s that simple.
RICK KARR: Firms like Jackson’s have only one incentive: to maximize the amount of money they make. Morreale believes that gave Sabal and its partner Oaktree Capital incentive to foreclose on the hotel building he’d put up as collateral against his loan. The blocks around his building have gentrified and become a nightlife strip. He also alleges in an affidavit filed in Colorado court that the firms misled him and instructed him to stop making payments on the loan.
JESSE MORREALE: They said that basically the loans needed to be in default to have their decision-makers pay attention to a modification request. So we let the loans go into default at their suggestion.
RICK KARR: Did any alarm bells go off in you at that point?
JESSE MORREALE: They told me that I was in a deferral period. And that was evidenced by the fact that they weren’t sending me any loan statements. They weren’t sending me invoices. And I trusted them, which was a mistake.
RICK KARR: Is that something that happens? That you actually have to advise people to get behind on their loans?
PAT JACKSON: No. I mean, certainly not. I mean, if we have a borrower that’s coming to us saying, “Hey, I’ve got problems. I need to work with you.” We’re gonna work with them to try to find the best overall outcome.
RICK KARR: Jackson alleges that Morreale made unacceptably low offers to settle his debt. Morreale alleges that Jackson and his colleagues wouldn’t negotiate in good faith. As the battle escalated. Morreale turned for help to the FDIC. The agency has enforcement power over the financial firms like Sabal and Oatkree Capital that it partners with. The FDIC’s Brett Edwards wants borrowers to come to him if they have complaints.
BRET EDWARDS: Because we wanna hear about it, we wanna investigate it. I’ll tell you there’re a lot of controls we have in place. We do annual audits, we do site visits. We thoroughly investigate all complaints.
RICK KARR: But when Morreale wrote at least two letters to the FDIC detailing his concerns and made dozens of phone calls to the agency, the FDIC replied that there was nothing it could do. And its investigation consisted of contacting one of the companies Morreale alleges is trying to grab his property. We pressed to find out more from the FDIC during a conference call.
RICK KARR: We got all the parties’ permission to record the call. Here’s how the FDIC’s Brett Edwards got it started:
BRET EDWARDS: Rick and Hannah, thanks for doing this. And I’m gonna turn it over to Pat, and he can get into the actual details of this particular credit situation. Thank you.
RICK KARR: He turned the call over to Pat – as in Pat Jackson of Sabal Financial. All of the details about the case we learned during that call came from Pat Jackson. The FDIC didn’t provide any specific information.
RICK KARR: There’s no way to know how many businesses may be in Morreale’s situation because nobody’s keeping track. There’s at least one other business in Denver. When Sabal filed to foreclose on its property, it laid off dozens of employees. Other business owners testified before the House Financial Services Committee. Jesse Morreale’s business is in bankruptcy court.
RICK KARR: Is that the collateral damage of 2008 and the financial meltdown?
BRET EDWARDS: I think what the FDIC’s view on that would be is we’ve tried to do as good a job as we can, given our statutory mandate, to make this work for everybody. But I think the concept that this could’ve been a painless exercise, it’s probably just not gonna happen.
RICK KARR: As you’ve already said, even before the FDIC’s involvement here, there were issues. Some people might look at this and say, “It’s Jesse’s fault. It’s not Oaktree’s fault. Oaktree’s just doing what they do.
JESSE MORREALE: The businesses wouldn’t be here without me. I build things. These people don’t build anything. They’re out there taking things from people that other people have built.
RICK KARR: Is this the FDIC’s fault? Is this Oaktree’s fault? Is this Sabal’s fault?
JESSE MORREALE: I think it is a combination of the FDIC and Oaktree Capital and Sabal. This is the ultimate display of avarice without conscience, without consequence. And that’s a result of the FDIC failing to appropriately oversee their partner. Fundamentally, if this is how the FDIC is protecting us, I don’t need these kinds of protections.
RICK KARR: It’s now up to a Federal bankruptcy judge to decide whether Jesse Morreale keeps the building or loses it to the hedge fund and real estate firm. That ruling’s expected on May 15th.