Image: Yellowstone Club
Erik Petersen  /  Bozeman Daily Chronicle via AP f
At the Yellowstone Club in Montana, a $375 million loan in 2005 also led to bankruptcy just three years later.
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updated 5/27/2009 10:02:22 AM ET 2009-05-27T14:02:22

Not too many years ago, $1 million might have bought you a midrange house on the side of a slope of a midrange Western ski hill.

Today, you could buy an entire ski resort for that price, as long as you have a few bucks left over for operating costs and some good lawyers to duke it out with investment bank Credit Suisse.

Of all the bad loans made in 2002-06, Credit Suisse's Western resort loans have to be among the worst. Packaged up as "collateralized loan obligations" and sold off to institutional investors, Credit Suisse made the deals, took the fees, and laid off the risk on someone else. Except, as it turned out, the legal risk.

Tamarack Resort, in Idaho, took $250 million from Credit Suisse in 2006 for a brand new ski hill and golf course and base village and all the rest. It's now defunct, awaiting foreclosure, and with luck someone will pick it up for nothing (literally) and bring it back to life. The payback on the $250 million loan? In all likelihood, zero.

At Promontory Club, outside Park City, Utah, Credit Suisse lent $350 million in 2005, most of which was immediately taken (by agreement) by the developer, Pivotal Group of Arizona. When lot sales stalled in 2007, bankruptcy followed, and an auction of the property drew virtually no interest. End result? Pivotal Group got the property back for about $30 million. The payoff on the $310 million or so remaining on the loan balance? Zero.

At the Yellowstone Club in Montana, the most elite of the bunch, a $375 million loan in 2005 also led to bankruptcy just three years later. This time, Credit Suisse was sure the property had to be worth real money and fought tooth and nail in bankruptcy court to gain control of the club so that it might mothball the property and sell it down the road – or else force the wealthy members to pay up.

But the bankruptcy court judge didn't like that plan and eventually ruled that the original loan was so reckless that Credit Suisse would lose its secured position. A special new appraisal method had valued that club at more than $1 billion back in 2005, though any normal appraisal would have put the value at less than half that. Since the parties couldn't agree on a 2 percent or 3 percent loan fee, it was decided by a coin flip. Seriously.

The Yellowstone Club actually had an eager buyer in the person of Sam Byrne, a member of the club and a distressed real estate specialist, so Credit Suisse managed some recovery. Under the terms of a settlement reached earlier this month, its lender group will get a new $80 million note to replace the $310 million reaming on the original loan and might get more by going after former club owner Tim Blixseth. The payback? Maybe 25 cents on the dollar.

Lake Las Vegas in Nevada is the biggest of the bunch, and its prospects are grim. Credit Suisse and its lenders group are on the hook not only for the original $560 million loan but also for $127 million in debtor-in-possession financing that it had to provide post-bankruptcy to keep the property from drying up and blowing away. (It's built around an artificial lake, and one concern was that unmaintained pipes would crack and permanently drain the lake, putting, shall we say, downward pressure on the value of the lakeside property. Really, I'm not making this up.)

Likely recovery at Lake Las Vegas? Hard to say, but something close to zero would certainly be a reasonable guess.

Credit Suisse's biggest concern is avoiding lawsuits from the clients who bought its crappy paper – an especially large concern following the judge's harsh ruling last week in the Yellowstone Club case. That ruling will probably be vacated as part of the settlement agreement giving the club to Byrne and his Boston-based private equity firm CrossHarbor Capital Partners, but U.S. Bankruptcy Court Judge Ralph B. Kirscher's words nonetheless ring loud:

The only plausible explanation for Credit Suisse's actions is that it was simply driven by the fees it was extracting from the loans it was selling, and letting the chips fall where they may. Unfortunately for Credit Suisse, those chips fell in this Court with respect to the Yellowstone Club loan. The naked greed in this case combined with Credit Suisse's complete disregard for the Debtors or any other person or entity who was subordinated to Credit Suisse's first lien position, shocks the conscience of this Court.

Shocking, yes, but in the era of bubble banking, all too typical.

Copyright Washington Post.Newsweek Interactive

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