Flagstar Bank - MatlinPatterson Global Advisors Investment/TARP Participation

MatlinPatterson Global Advisors Investment/TARP Participation

In January 2009, Flagstar was able to raise $523 million of investment capital from three sources. These included $250 million from MatlinPatterson Global Advisors, $266 million from the U.S. Treasury's Troubled Asset Relief Program Capital Purchase Program and $5.23 million from management. This was in effect a rescue to restore liquidity to the bank and allow them to cover mortgage related losses incurred in their loan portfolio. This initial investment by MatlinPatterson was followed up shortly after with an additional $100 million investment to cover deepening losses. A summary of MatlinPatterson's Flagstar investments follows (note, Flagstar had approximately 8 million shares outstanding prior to these investments, adjusted for the 1:10 reverse stock split in 2010):

• December 2008, purchased 31,250,000 shares for $8/share
• January 2009, purchased 12,500,00 shares for $8/share
• January 2010, purchased 42,253,521 shares for $7.10/share in a special Rights Offering
• March 2010, purchased 20,000,000 shares for $5/share in a secondary offering
• October 2010, purchased 250,000,000 shares for $1/share in a private offering (this was completed in multiple parts via convertible shares later converted to common after a shareholder vote was held and approved to increase the allowable number of outstanding common shares)

Additional capital was raised from current shareholders in the "Rights Offering" and from private equity in the "Private Placement Offering" (see above). Of note, David Einhorn (hedge fund manager) in early 2010 purchased approximately $16 million of Flagstar stock and later liquidated his position in early 2011. In 2010, the stock traded as high as $10 and closed the year below $2. The effect of these investments and issuance of new shares had a dilution impact of more than 70-fold on legacy shareholders ("Legacy" references Shareholders prior to 2008). Shares outstanding rose from less than 8 million to over 555 million. Without these investments, the bank would have been deemed distressed or insolvent and been required to sell itself or fallen into receivership. Equity participation in addition to TARP was a contingent factor in TARP approval and it was unlikely the government would have approved their TARP application otherwise. As of April 2012, Flagstar has yet to repay their TARP obligation.

Following the stock market close on October 10, 2012, the company effected its second 1:10 reverse stock split per prior recommendation of the Flagstar Board of Directors and shareholder approval at the annual meeting. This action brings Flagstar's stock back into compliance with NYSE minimum share price requirements and avoids delisting. (Financials in this article have not yet been adjusted for this second reverse split.)