Tilton thought she had everything she wanted—“Good-looking man, great sex, small island, still looking good in a thong bikini”—and planned on moving to a small island in the Philippines. But one night, on vacation in Costa Rica, she woke suddenly. “I was laying there in this hotel room, and I saw my father and my Mayan teacher very vividly,” she explains. “They said this was not what was planned for me. I said, ‘Why did I go through this path, to empty myself out of any needs or material longings, only to be sent back to New York to be a businessperson?’ And the answer was: You’re not capable of leading until nothing can hold you back. Get your ass back to New York. So I got up in the middle of the night and left.”
In the classroom at Yale, Tilton outlined the four qualities of a warrior, as described by Castaneda. “Cunning is one,” she said. “Not deceit, but the ability to move people in a direction. The second is sweetness. The third is patience, which was hard for me to learn. But the hardest one for me to learn was ruthlessness. Because that word sounds mean. But that’s not what it is. Ruthlessness is the ability to step over someone you care about, someone who has been good to you, for the greater good.”
In 2000, after she left her boyfriend in Costa Rica and came back to New York, Tilton formed a partnership with Dennis Dolan, a distressed-debt specialist at the Japanese bank Nomura. The following year, after the economy tanked, they purchased a portfolio of distressed commercial loans at a 26 percent discount and packaged them, using a structure Tilton later patented, into a collateralized-loan obligation called Ark.
At that time, CLOs (and their cousins, CDOs) were new but not unusual. “The real achievement,” says Michael Meagher, a former colleague at Kidder Peabody, was that she got the ratings agencies to give what was essentially a collection of subprime loans a AAA rating. Institutional buyers piled in, and as the economy improved and the distressed companies paid off their loans, the securities issued by Patriarch grew in value. The influx of cash enabled Patriarch to compile other CLOs for which it served as “collateral manager,” handpicking the loans and collecting a 2 percent management fee regardless of performance. By selling the risk of loans made by one part of the company to an investment portfolio managed by the other part of the company, Patriarch was able to reduce its exposure considerably.
Eventually, however, Tilton, a self-described “control freak,” became frustrated with the one element of this arrangement that remained outside of Patriarch’s influence: the ability of the distressed companies to pay back the loans she issued. But if Patriarch were to own the companies, it could force them to pay on loans regardless of whether that was in their best interest—Patriarch could be the lender, the securitizer, and the borrower. By 2004, Tilton had gotten into the business of owning factories herself. And only herself. Dolan retired in 2002, under somewhat mysterious circumstances. “He has never commented on Patriarch,” his lawyer says. “And he never will.”
As she built her business, Tilton relied on her cunning and patience, buying small, rinky-dink operations—a textile company in Georgia, the “original behind-the-head ear warmers” in Baltimore. Over time, she developed her ruthlessness. “She’s tough. Tough tough tough,” says Jamie Salter, the former CEO of Hilco Consumer Capital, who went up against Tilton during the auction for the bankrupt remains of Polaroid in 2009. “We came in very prepared to win, and she came out of nowhere. Every trick we pulled out of our bag, she had another trick in her bag.” “Luckily, I trust no one,” Tilton said at one point, pulling out an alternate business plan that forced a frustrated Hilco to rework theirs. Later, according to someone present, she told the crowd this variation of the well-worn joke: “There are three universal lies: Margins are weak, but we’ll make it up in volume; the check’s in the mail; and I won’t come in your mouth.”
The tricks didn’t work: Patriarch lost Polaroid. But over the decade, Tilton emerged victorious in dozens of deals, and Patriarch evolved into a private-equity firm—though one that held onto its acquisitions, rather than selling them off once they became healthy. She attributes her decision not to let go of moneymakers like Dura Automotive to the fact that it’s not a seller’s market. However, the Patriarch-managed CLOs own dozens of Patriarch loans issued to Patriarch-owned companies that are severely underperforming. These companies, like the fire-truck-maker American LaFrance, are more like zombies than functioning businesses—they can make their monthly interest payments, but they appear more likely to default than ever pay back their principle. This leaves the CLOs dependent on profitable companies like Dura to pay their principal-plus-interest at a premium rate so that the CLOs remain healthy enough to function—and Patriarch can collect its fees.