PCC Computer Education. Register now!

 

LEAD STORY

How does it feel to make $140 million by the age of 32 and then lose it all?
Ask Andrew Wiederhorn

BY NIGEL JAQUISS

njaquiss@wweek.com

Editorial intern Jessie Seyfer contributed to this article.

Wiederhorn lives in a house formerly owned by another local company founder/CEO, Casey Powell of Sequent Computer Systems.

Not all the dud loans Wilshire buys can be improved.
At the end of 1997, Wilshire owned $170 million worth of foreclosed real estate.

In 1997 Gearhart officials placed a $700,000 bond measure on the ballot to pursue condemning the land on which the path to Little Beach runs. The measure failed overwhelmingly.

"It's my firm belief that he [closed the path] to increase the value of his property," says Patricia Roberts, secretary of the Gearhart Homeowners Association.

Wiederhorn and Larry Mendelsohn both receive annual salaries of $300,000. That figure is in line with industry standards.

At the time of the public offering, Wiederhorn retained half the company's shares, while company president Mendelsohn owned 25 percent. Wilshire trades under the ticker symbol WFSG.

Coincidentally, one of the few financial services companies that did worse than Wilshire last year was the Lake Oswego-based Southern Pacific Funding.

The OTS lifted the cease-and-desist order against Wilshire's banks
in October 1998
but subsequently informed the company that further enforcement actions may be imposed.

Wiederhorn sees his reversal in business rather than personal terms: "I still have a paycheck, but I also have 200 people around the world without jobs, and that's very troubling."

Wiederhorn says
he could have explained his strategy to shareholders more effectively: "Trying to better educate your institutional investors about the business is better than them trying to figure it out themselves."

 
THE NET EFFECT: did Yahoo! contribute to Wilshire's troubles?

Last fall, Andrew Wiederhorn, Wilshire Financial Services Group's founder and chief executive, was honored as Oregon's Entrepreneur of the Year. As he strode to the podium to collect his award, most of the 1,100 people in the Convention Center audience recognized a certain irony.

Wiederhorn had created 800 jobs and amassed a fortune approaching $140 million--all by the age of 32. The two previous winners of the award, Phil Knight and advertising executive Dan Wieden, had done nothing remotely similar at that age. Yet as Wiederhorn accepted perhaps Oregon's most prestigious business award, he teetered on the brink of ruin.

Wearing a slate-blue Façonnable shirt and a black double-breasted suit with enough shoulder padding to stuff an easy chair, Wiederhorn joked that he was fortunate his award didn't depend on the recent performance of Wilshire's stock.

"These," Wiederhorn said, attempting a grin that quickly slid off his face, "are interesting times."

Portland has never witnessed a rise so meteoric or a decline so swift as Andrew Wiederhorn's. Fifteen months ago, the native Portlander's stock in Wilshire was worth nearly $140 million. Today, his shares have a value of $140,000. In early January, The Wall Street Journal published a list of 1998's worst-performing stocks. Wilshire ranked number five.

Interviews with associates, friends and foes make it clear that Wiederhorn's empire was created by his single-minded focus and the astonishing ease with which he borrowed money. Curiously, these same factors, coupled with last summer's worldwide economic meltdown, caused his overnight collapse.

"Wiederhorn's raison d'être was financial engineering," says Bob Scanlan, a local veteran of 30 years in real-estate development and finance. "It can produce enormous profits, but it's difficult to sustain."

Wilshire's vaguely art-deco brick headquarters sit almost in the shadow of Wiederhorn's alma mater, Lincoln High. Although his private office, complete with his own bathroom, has the obligatory dark wood paneling and ponderous leather furniture, the dominant theme is kids.

Wiederhorn didn't waste any time having a family. Photographs of his children--he and his wife, Tiffany, have four, ages 4 through 10, with another on the way--cover nearly every flat surface. Most animated when discussing his kids, Wiederhorn also donates substantial time and money to the Boys and Girls Aid Society of Oregon.

"He has a level of compassion that I haven't seen in other highly focused business people," says Michael Balter, the organization's director. "Some come on boards for social reasons; he really cares about young people."

Wiederhorn is in constant motion. A rangy man a little over 6 feet tall, he fidgets, paces and answers questions almost before they're asked. Large dark eyes and a wide mouth frame his face. His hair is always neatly moussed. He's a fastidious dresser who wears a diamond wedding ring and favors ornate watches and elegant cufflinks. He's also frugal enough to have his leather shoes resoled in rubber. Wiederhorn never wastes a word and never needs anything repeated, say those who know him. Every second of his day is carefully scheduled by his secretary, who arrives at her desk at 6 am.

Wilshire's headquarters are a short distance from the Portland Heights house where Wiederhorn was raised. His father, a traveling salesman, died of lung cancer when Wiederhorn was nine. His mother taught at Lincoln High to support the family.

Even in high school, Wiederhorn was a driven entrepreneur. With money he earned as a dishwasher and busboy, he bought a Jet Ski and rented it out at Willamette Park. "I knew what I was interested in, and I wanted to be successful," he says. "I was very focused on one goal at a time."

After zipping through the University of Southern California's undergraduate school of business in three years, Wiederhorn set up a finance company on Los Angeles' Wilshire Boulevard--hence his firm's name. From its start financing cell phones, Wilshire quickly jumped into the business of buying bad loans and foreclosed assets from the Resolution Trust Company, the government agency set up to bail out failed banks.

In 1990, Wiederhorn and Wilshire's president, Larry Mendelsohn, a former Wall Street securities trader and USC professor, moved their operation to Portland. Over time Wilshire's activities have evolved into more seemingly complex transactions, but they're still in the same basic business.

"The way we make money," Wiederhorn explains, "is buy things at one price and restructure them and sell them at another price or to lend money at one price and borrow at a lower price."

The "things" Wiederhorn buys are mostly poorly performing loans, or what he calls "scratched and dented assets." Viewed another way, Wiederhorn's fortune, like those of prominent Portland families such as the Schnitzers and the Zidells, was made by buying and selling scrap.

Over the past decade, consumer debt, which includes loans made against houses, cars, credit cards and even mobile homes, has exploded. Of course, many of these loans don't get paid on time if at all. Lenders, such as banks, mortgage companies and credit-card issuers, don't like dealing with deadbeats, so they sell their poorly performing loans to companies such as Wilshire. A recent Business Week article estimates the size of this market in the United States to be $2.5 trillion. Wilshire usually buys such loans at a healthy discount. For instance, in one 1997 transaction, Wilshire bought $174 million worth of credit-card loans for slightly less than $2 million.

After the company buys dud loans, Wiederhorn's army of collection employees attempts to improve the payment performance of the debtors. If the loan shapes up even slightly, Wilshire sells it for a price higher than it paid--the same way scrap merchants clean up their inventories and sell them to smelters. Typically, Wilshire sells large pools of loans to Wall Street firms such as Bear, Stearns and Prudential Securities, which then sell them on to investors.

Early in his career, when his peers were wondering if they'd ever be able to afford a house, the 28-year-old Wiederhorn bought the First Bank of Beverly Hills and Girard Savings Bank, also located in California. Some companies get into banking to run ATM machines or make loans to corporations, but Wiederhorn had a different agenda for his banks: He wanted access to cheap money so he could buy even more dud loans. Bank depositors accept much lower rates of interest than the institutional investors who had been Wilshire's primary funding source. "We bought two sick banks," he recalls. "They were just about ready to fail. We bought them very cheap."

When pressed to assess his strengths, Wiederhorn is modest but says he has the "vision to go from A to Z." People who know him, from Henry Bauer, a Portland lawyer who was Wiederhorn's scoutmaster, to Marshall Glickman, with whom Wiederhorn pursued the rights to develop Civic Stadium, all use the same words to describe him: "focused" and "decisive."

This focus sometimes gets him in trouble. In 1994 and 1995, according to public documents, the federal Office of Thrift Supervision issued reports criticizing the two Wilshire banks' record keeping, risk analysis and reserve levels. Put simply, the OTS thought Wilshire was too capricious with depositors' money.

In October 1996, the OTS took the more serious step of issuing cease-and-desist orders, prohibiting the banks from increasing the amount of deposits they took.

For Wiederhorn, who only bought the banks so he could solicit deposits with which to buy more bad loans, the federal action was a major roadblock. Such a disciplinary action is not an everyday occurrence. "Enforcement orders are uncommon," says Tom Mason, a spokesman with the OTS in Washington, D.C.

Rather than pausing to address the OTS' concerns, however, Wiederhorn focused on other ways to raise money. In December 1996, less than two months after the OTS said Wilshire couldn't have any more depositors' money, the company sold stock to the public for the first time.

Investors snapped up the 25 percent of Wilshire offered at $10.50 a share and also bought $75 million of Wilshire bonds. The offering established the value of Wiederhorn's 50-percent stake in Wilshire at $38 million; Wiederhorn also held stock options then potentially worth up to $11 million. He was 30 years old.

By any financial yardstick, Wiederhorn had joined Portland's elite. As was the case with his dealings with the OTS, however, the young financier soon showed a disdain for playing by other people's rules.

In 1995, Wiederhorn purchased a 9.22 acre estate in Gearhart for $3 million. Called Green Pastures for its expansive grounds, the property dwarfs nearly every other in town. The Wiederhorns signaled changes were in store by renaming the estate Ivy by the Shore (their West Hills home is called "Ivy").

Unlike other beach towns, Gearhart has no T-shirt shops, fast-food shacks or amusement arcades. Immediately north of Seaside, the village of 1,100 stands apart from its neighbors like a Rolls-Royce on an 82nd Avenue used-car lot. Its weather-beaten homes have been passed down for generations through families with names such as Schnitzer, Meier and Mark.

Wiederhorn's property borders a strip of sand known as Little Beach. Bill Berg, a retired professor of classics at Stanford and a member of the town's Historic Landmarks Commission, says that for the past 100 years Gearhart residents have strolled to Little Beach along a path that crosses what is now Wiederhorn's property.

In early 1996, Wiederhorn put a chain-link fence across the path, citing safety concerns. Nobody questioned his legal right to deny townspeople access, but the move violated the customs, manners and history of Gearhart.

"A lot of the ocean people--the Portland gentry--don't know [the path] exists," Berg says, "but it was precious to the less affluent here in Gearhart. That's who Wiederhorn hurt."

An estimated 250 people showed up for a town meeting to discuss the closure. When Wiederhorn rose to speak, Gearhart Mayor Kent Smith had to rap his gavel repeatedly to silence the booing. The young financier's message: no access. Emotions flared, Smith says. Somebody created a wanted poster with the Wiederhorns on it. Vandals damaged part of the fence, and callers reportedly left threatening messages on Wiederhorn's answering machine.

Today Wiederhorn considers the issue closed. He shrugs off the townspeople's vehemence. "It was just a process," he says of more than two years of acrimony. "I don't take any of this stuff personally."

Nearly three years after it was erected, some residents still can't quite believe the fence exists. "It just seemed to change Gearhart," Berg says. "Its spine was broken. [The path] characterized Gearhart, and with it gone, the town's just not the same."

By October 1997, Wilshire stock reached an all-time high of $33.50 per share, making Wiederhorn's shares and options worth almost $140 million. Wilshire had assets, mostly risky loans, of $1.6 billion--nearly five times the total amount the company owned two years earlier.

With bank deposits still capped by the OTS, and it being too soon to sell more stock to the public, Wiederhorn had financed the company's explosive growth with the most fickle kind of money--short-term loans from Wall Street investment banks. Such borrowings increased from only $13 million in 1995 to nearly $1 billion in 1997.

He couldn't have picked a more effective recipe for disaster. Early last summer Asian economies began to collapse. As turmoil spread around the world, panicky investors shunned everything but the safest securities--in most cases, U.S. government bonds. This was the so-called "flight to quality."

On Aug. 18, Russia devalued its currency and told the world it couldn't pay its debts. "Russia's devaluation was a red alert for global investors, who wondered which market would be the next to fall," The Wall Street Journal reported. The relationship between Russia and Wilshire's scrap yard of shaky loans may not have been obvious, but to investors they both smelled the same: risky.

Wilshire's formula for success was to buy bad loans, clean them up a bit and resell them. But when the Asian crisis hit, investors shunned Wilshire's loans; even the better-quality ones were considered risky investments. "Those markets just shut down," says Jay Huck, who analyzes finance companies for the Center for Research and Analysis in Rockville, Md. "When you're burning through [cash] like Wilshire was, you've got a real problem."

The market chaos hurt Wilshire in two ways. The company traditionally used its portfolio as collateral to borrow from Wall Street. The Wall Streeters knew that Wilshire's collateral was rapidly declining in value. This meant Wilshire might have to put up even more collateral to borrow the same amount of money. The alternative was to repay the lenders, but since there were no buyers for most of what Wilshire owned, the company couldn't do that.

By early September, the situation was dire. Wilshire's stock price had fallen below $10 a share. It was in that environment that Wiederhorn tried to explain his dilemma when he received his Entrepreneur of the Year award. "Today," he told the audience, "there is virtually no credit market in existence." What he meant was that nobody wanted to loan Wilshire money anymore.

By the week of Oct. 12, the investment bank Salomon Brothers, which suffered huge losses on its own risky investments, was getting nervous. That was bad news for Wilshire, which had borrowed $500 million from Salomon. Wiederhorn flew to New York to plead his case and thought he had put Salomon's fears to rest. He was wrong.

Three days later, Wiederhorn says, Salomon demanded money. Wilshire didn't have it and was forced to sell enough loans to raise half a billion dollars. With buyers for risky assets hard to find, Wilshire had to accept far less than it thought the loans were worth, Wiederhorn says. "There were six weeks," he says "where pretty much every day sucked."

On Nov. 23, Wilshire reported its third-quarter results: a net loss of $119 million--far more than the company's total earnings since going public.

Even more dramatic was the announced shift in ownership. Some of Wilshire's lenders, including mutual-fund companies American Express Financial Advisors and Capital Research, converted their debt to equity. The conversion signaled that lenders feared they wouldn't get paid. Instead, they decided to seize the company's assets.

Wilshire agreed to issue a massive amount of new stock, diluting Wiederhorn and Mendelsohn's collective stake in the company from 50 percent to 3 percent. Wilshire shares closed that day at 1 5/8; to add insult to injury, the next day the Dow Jones Industrial Average soared to what was then its all-time high.

Under the announced restructuring, Wiederhorn still has a job, but with lenders taking over the company, his power has been greatly reduced.

Ironically, the CEO barely sold any of his shares during Wilshire's glory days. Securities and Exchange Commission regulations prohibit insiders from selling until two years after the initial public offering, which, for Wilshire, would have been mid-December, 1998. In fact, in a show of self-confidence, Wiederhorn actually increased his holdings as prices fell. "As a family we bought tons of stock over the summer, unfortunately," he says.

As if seeing the value of his shares wiped out weren't enough, Wiederhorn is also personally in hock. Wilshire Capital Corporation, a private company he and Mendelsohn own, borrowed in excess of $150 million from local pension-fund manager Jeffrey Grayson of Capital Consultants Inc. ("Trouble with a Capital T," WW, Oct. 28, 1998). Wiederhorn and Mendelsohn guaranteed the debt personally.

The guarantees were backed by Wilshire stock, now barely worth the paper it's printed on. Wiederhorn says he's not insolvent and that he and Mendelsohn are negotiating with Grayson. He insists that Grayson won't be moving into his house any time soon. "This isn't personal," Wiederhorn says. "It's corporate." Grayson didn't return WW's calls.

As it stands today, Wilshire is in the middle of what is evocatively called the "cramdown" period. The company is negotiating with all of its creditors to see how many cents they'll accept for each dollar they're owed. Wiederhorn is confident he can rebuild and says that the creditors want him to stay on to run the company.

In the wake of last fall's upheaval, Wiederhorn has laid off nearly 200 employees and cut back on some of his perks. Instead of using a corporate jet, he now flies commercial whenever possible. He also felt the pinch over the holiday season. "We gave hugs for Christmas this year," he says.

That the scrap yard he founded is now scrap itself isn't lost on Wiederhorn. "It's ironic that we're in the business of buying distressed debt and restructuring it," he says, "and here we are restructuring
our own."

 


INCYBER TRADING
The Internet search engine Yahoo! provides a message board for nearly every publicly traded stock. People who are interested in a given stock post messages anonymously. As Wilshire's troubles deepened, the number of Yahoo! postings increased.

Wiederhorn is convinced that some of the Yahoo! postings contributed to the decline in his company's stock price and that at least one of those postings provided information about Wilshire that could only have come from someone with inside knowledge of the company's operations. He says that last year his company filed suit against Yahoo! to find out who was dishing up the dirt.

Yahoo! won't comment, but Wiederhorn says the company has provided him with the names of the individuals in question. He says at least six Portlanders were posting messages that he calls damaging and untrue; in addition, he was given the name of an ex-employee of the New York investment bank Bear, Stearns who posted inside information obtained when the company underwrote Wilshire bonds.

"May it have affected our stock?" asks Wiederhorn, "Sure. Will we go after them? Maybe."

 

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Willamette Week | originally published January 13, 1999

 


Portland Travel Specials! Full Sail Brewing

Advertiser