Gladwyne investment banker unraveling the failure of a Dallas bank

For a serious Eagles fan, Kenneth L. Tepper has been spending an awful lot of time this summer in the hometown of the archrival Dallas Cowboys.

"I leave my Eagles jerseys at home," Tepper joked.

What takes the Gladwyne investment banker to Dallas is his role in cleaning up the financial mess at Guaranty Financial Group Inc., which owned Guaranty Bank, the fourth-biggest U.S. bank failure since 2008.

Tepper got serious Monday, filing a 114-page lawsuit against Temple-Inland Inc. that seeks more than $1 billion in damages. The lawsuit, filed in U.S. District Court for the Northern District of Texas, accused Temple-Inland of looting Guaranty Bank by, among other things, taking $170 million in dividends from Guaranty in 2006 and 2007, transferring $335 million in real estate assets from Guaranty for little or no consideration, and loading Guaranty with $305 million in debt to pay off other preferred securities holders. Last week, Temple-Inland did not respond to a request for comment on the possibility of such a lawsuit.

The Guaranty case is more intriguing than most of the 389 other bank failures that followed the collapse of the housing market in 2007.

Guaranty was spun out of Temple-Inland, a manufacturer of corrugated cardboard and building products, in December 2007, when the financial crisis was already under way. It immediately ran into financial trouble, eventually wiping out its equity with a $1.45 billion write-down of junk mortgage bonds.

Guaranty Financial went bankrupt in Dallas in August 2009, having filed just three quarterly reports as an independent public company, and a week after the Federal Deposit Insurance Corp. took control of Guaranty Bank.

Now, International Paper Co. is pursuing a $4.1 billion hostile bid for Temple-Inland.

That constellation of events gives Tepper's job as liquidating trustee for Guaranty Financial, which had $13 billion in assets at the time of its failure, a compelling edge.

"Certainly, because of the scale and scope of Guaranty, it is one of the most interesting things I've had the privilege of working on," said Tepper, 49, an Episcopal Academy and Emory University graduate, who worked on failed banks for the Resolution Trust Corp. during the savings-and-loan bust of the late 1980s and early 1990s.

Beyond the usual job of clawing back any fraudulent payments to preferred parties that Guaranty Financial may have made shortly before bankruptcy, Tepper is likely to file lawsuits against companies and individuals who contributed to the failure. The goal is to raise money for Guaranty Financial's creditors, such as the FDIC, with a nearly $2 billion claim, and bondholders owed more than $300 million.

Tepper, who started his work at Guaranty Financial in May with just $7 million left in the bank, said it was easy to see that something wrong happened at the Texas bank.

"A dog can always tell whether he has been kicked or tripped over," Tepper said. "I'm the dog. I can tell you, we weren't tripped over. We were kicked," he said, speaking as successor to the bank holding company.

The FDIC, which has claims in more than 50 bank-holding-company bankruptcies totaling billions of dollars, sold Guaranty Bank's assets to BBVA Compass. The FDIC's estimated loss from the Guaranty failure has fallen from $3 billion initially to $1.2 billion at the end of 2010.

Any success Tepper has will shave that loss further because the FDIC is due 15 percent of the money he gathers.

The deposit insurance fund can use every bit. It plummeted from a surplus of $53.8 billion in March 2008 to a $20.9 billion deficit in December 2009. By March 2011, the deficit was $1 billion.

"The FDIC is one of my primary interests," Tepper said during a lunch interview at a Radnor restaurant, where he ate just two pieces of sushi, saying he was still full from the steak he had eaten the evening before in Dallas.

How did Tepper, chief executive of Kildare Financial Group in Radnor, become liquidating trustee for a big Texas bank?

That happened courtesy of lawyers at Duane Morris L.P., the Philadelphia law firm that has its hand in 35 to 40 bank-holding-company bankruptcies nationally as counsel for holders of a certain kind of bank debt that was popular before the financial crisis, according to Duane Morris partner Hersh Kozlov.

Duane Morris' client, known at the time as Tricadia Financials Restructuring Partners Ltd., objected to Guaranty Financial's original liquidation plan, arguing that it favored the FDIC over other creditors - such as Tricadia, which held debt with a face value of $53 million.

The FDIC countered that Tricadia was "an eleventh-hour interloper" that bought debt late in the game, presumably at a steep discount.

As part of a compromise, Tepper was named trustee.

"The most important thing in my opinion is that everyone agreed on the right person to manage this very complicated process," said Kozlov, who acknowledged that he and Tepper have been friends for years.

Now, Tepper, who is paid $25,000 a month as trustee and will get to keep 2 percent of the money he brings in for creditors, is engaged in a forensic study of the steps leading to Guaranty's collapse.

"This one really breaks the mold," according to Tepper, who said he has worked on dozens of cases of failed banks. "Fortunately, I don't think we're in a situation where we're going to have to make razor-thin decisions on what was right and what was wrong."