(Cross-posted from Pelto’s Point at the New Haven Advocate)
How many times have you heard that one…
While UConn spends money on consultants, Governor Malloy continues the corporatization of higher education by appointing high-ranking business executives to the new Board of Regents.
Last week, Governor Malloy appointed financier Gary Holloway of New Canaan and five others to Connecticut’s Board of Regents. Among them was a former General Counsel at Travelers, the Chairman and Chief Executive Officer of Magellan Health Services and a former Goldman, Sachs and Silver Point Capital executive.
The consolidation of Connecticut’s higher education system was one of Malloy’s most controversial initiatives and the newly created Board of Regents will be responsible for the consolidation and governance of the four Connecticut State Universities and the state’s twelve community colleges.
Putting wealthy corporate leaders on university boards of trustees, in order to get their donations, is nothing new. In fact, there are lots of impressive buildings and programs as a result.
But more and more often these business leaders believe that their role goes beyond posterity building and instead they seek to contribute their corporate expertise to the basic operation of universities.
The attitude seems to be, since I successfully managed a multi-million dollar company, I can certainly do the same for an institution of higher education.
Of course, universities are fundamentally not about making money and the “product” they create is hard to measure by traditional business standards.
A prime example of the corporatization of higher education is the growing use of consultants. A traditional business practice in the corporate world, university trustees are now demanding that “academic professionals” bring in real experts to determine financial and policy issues that, in turn, have a profound impact on a university and its activities. As noted in a previous post, the UConn Board of Trustees, for example, retained a Washington DC based consultant for $3.9 million to identify how UConn can be more efficient.
So now enters the new Connecticut Board of Regents, Gary Holloway and the Governor’s other appointees.
Although lacking in public higher education experience, one thing is clear when looking at Gary Holloway’s career, he is premier player in the Advanced Capitalist System in which we live.
In fact, Holloway’s career is an amazing case study of how today’s financial investment world actually works.
Gary Holloway is a founding partner of Five Mile Capital Partners, an investment firm headquartered in Stamford, Connecticut and New York City.
According to the firm’s website, “Five Mile Capital Partners LLC is an alternative investment and asset management company…that specializes in investment opportunities in real estate, debt products, structured finance, asset-based lending and financial services private equity.” They manage over $2 billion in assets.
Prior to forming Five Mile Capital Partnerships, Holloway was a leading force behind Greenwich Capital. There he turned it into one of the country’s “premier investment banks in the fields of fixed income securities and structured products.”
Greenwich Capital was acquired by the NatWest Group in 1996 and four years later, NatWest was purchased by the Royal Bank of Scotland (RBS). As Mayor of Stamford, Dan Malloy helped attract RBS to Connecticut with taxpayer subsidies.
Through all of those years and iterations, Gary Holloway served as CEO or Co-CEO of Greenwich Capitol.
In 2001, Holloway, then Chairman of Greenwich Capitol retired when RBS announced that they were “integrating their global debt business.”
Soon after, Holloway and three others formed Five Mile Capital Partners.
So what do firms like Holloway’s do?
The story of the John Hancock Tower in Boston, Massachusetts reveals their approach to making money;
In December 2006, a company named Broadway Partners Fund Manager LLC purchased the John Hancock Tower for $1.3 Billion; about $400 million more than the previous owner had paid for the building three years earlier.
Broadway Partners’ funding came from a standard mortgage and $724 million from a “mezzanine debt package”
A mezzanine debt package is a form of financing that is secondary to the debt provided by banks and other standard lenders. Instead of being secured by a mortgage, the mezzanine lender has the right to take an ownership interest in the company being financed if the loan is not paid back.
Or as one reporter put it, “mezzanine loans aren’t secured by real estate, but by the company that owns the building or owns the company that owns the company that owns the building.”
In this case, Lehman Brothers Holdings Inc. (now-bankrupt), and Gary Holloway’s old company, Greenwich Capital (the subsidiary of the Royal Bank of Scotland) provided funding and oversaw the creation of the mezzanine loans. In the deal, Greenwich Capital was the mortgage holder.
According to news reports about the Hancock Building’s fate, as early as June 2008, 18 months after Broadway Partners purchased the building, a private equity firm called Normandy Real Estate Partners,
along with Holloway’s present company, Five Mile Capital Partners, began buying up the various mezzanine debt tranches (at discount prices since the value of the debt fell with the collapse of the commercial real estate market).
The news reports indicated that Normandy Real Estate Partners and Five Mile Capital purchased about $340 million of the face value mezzanine debt including “the senior-most tranche, the next two tranches, one-half of the third and a piece of the sixth.”
When Broadway Partners defaulted, as expected, on their loans in January 2009, Normandy Real Estate Partners and Five Mile Capitol were able to swoop in and buy the building at auction for $20.1 million (along with the assumption of the unpaid $640.5 million building mortgage from Greenwich Capital).
Apparently when these types of bankruptcies occur the various tranche holders got together to determine a course of action. In this case, the media reported that “going in, lawyers and bankers assumed that Normandy and Five Mile would control the sale, be the only bidders and bid no more than the outstanding value of its loan. For an outside bidder or junior creditor to prevail, it would have to first pay off Normandy-Five Mile and all creditors senior to it at par.”
In English that means no other bidder could possibly have come up with the money necessary to out bid Normandy and Five Mile.
It isn’t clear what happened to the remaining “junior creditors” when Normandy and Five Mile closed the deal but the implication was that they didn’t get very much, if anything, on their investments.
At the time of the sale, Normandy and Five Mile put out a statement saying “This transaction completes in 18 short months the long term objective that Normandy and Five Mile Capital had for The John Hancock Tower…That swift conclusion is a testament to the hard work and effort of all our team – from the careful planning and execution of the acquisition … and ultimately the successful monetization of the investment realizing a significant profit for our investors.”
It all paints an incredible picture of how investors become winners and losers in today’s marketplace.
And that, in turn, brings us back to Connecticut’s new Board of Regents.
It will be “interesting” to watch how Gary Holloway and the other corporate executives approach their task of “re-inventing” Connecticut system of public higher education.
For More about the Hancock Tower see; http://www.thedeal.com/newsweekly/features/a-faulty-tower.php, http://www.crunchedcredit.com/2010/06/articles/credit-crisis/the-hancock-tower-a-distressed-debt-success-story/, http://online.wsj.com/article/SB123851237251273961.html, http://www.normandyrealty.com/normandycorporate/News/tabid/55/ctl/PressReleaseDetail/mid/376/ReturnToList/False/id/84/Default.aspx
Oh for those who want to know more about one of our newest public servants…
Gary Holloway’s 12,000 square foot house in New Canaan is assessed at $4.6 million. His annual property tax bill ($62,194.86) is far greater than the salary of the average unionized state employee.
The Holloways are also major campaign donors including significant amounts to Chris Dodd, Joe Lieberman and a variety of other big-time Democratic senators. Here in Connecticut his choices have been pretty interesting. He gave $2,500 to one-time Democratic gubernatorial candidate John Nussbaum and also donated $1,500 to Mary Glassman.
Although Holloway and his wife have primarily donated to Democrats, they did contribute $2,500 to John Rowland, $1,500 Ross Garber and were especially strong supporters of John McCain, providing McCain,
McCain/Palin and the Republican National Committee with a total of $16,700.
Now Gary Holloway and the other corporate leaders will be helping to determine the future of Connecticut’s public system of higher education.