San Diego, Calif.-based Barratt American has been producing homes in Southern California since 1980. But like many private builders in today's environment, the company-which typically built 400 to 700 homes a year and reached annual revenues of $350 million at its pinnacle-now faces financial hardship. In August, CEO Michael (Mick) Pattinson spoke with senior editor Lisa Marquis Jackson about advocacy, banking behavior, and his determination to prevail.

CEO Michael (Mick) Pattinson Photo: Courtesy Barratt American BB: Where was Barratt at its pinnacle as far as unit count and revenues?

MO: At the height, we got to annual revenues of $350 million. Typically, we would do $150 million to $250 million a year. Typically, we would build 400 to 700 homes a year, and that's been a pretty consistent level for us for many years. We have been in business in Southern California since 1980, and we have weathered previous storms. We would have weathered this one if we had had a cooperative bank group. We still will weather it; it's just that we will have to weather it differently. We are a Southern California home builder, and we build a bit of everything-from entry-level housing to high-end, million-dollar semi-custom homes as well as some urban infill. At our peak, we employed 150 people, down currently to about 30. So obviously, we have had a big change in our circumstances.

BB: Tell me about the timeline of when things started to go bad with Barratt's banking situation.

MO: In August of 2007 when the credit crunch began, Bank of America was our lead bank, and they had three participating backs: Union Bank, Royal Bank of Canada, and Comerica. We had a facility of $125 million. At the time, we had about $100 million borrowed, and the bank created what I call this contrived default, where, for the first time in 27 years, they told us that they were not going to renew two of our project loans-one on a 25-house development and the other was on a 16-house development, so two small communities.

They said out of the blue, "We are not going to renew these lines, and because of that you are in default-in other words, your line is out of balance because we are going to keep the debt in place, but we are going to remove the collateral. But don't panic," they said. "We'll work it out. We will raise your interest rate because you are technically in default, but we will sit down with the other members of the bank group; we'll agree to new terms and conditions." It was a case of "carry on while we get around to doing what we are doing."

So we carried on with business. I won't say it was business as normal, because when you have a frozen line it makes things complicated. But we had unencumbered assets, so we sold land to raise cash. And because we had done business with a lot of our trade partners over many years, they kept working. So, when we closed escrows, we were paying down the line. So it fell from $100 million borrowed to $70 million borrowed over a seven-month period, during which time we continued to pay the monthly interest on the frozen line.

We had meetings with our bank group; we had conference calls; we produced business plans and cash flows ad nauseum at their request while we went through this dance. At the end of seven months, with the patience of our subcontractors exhausted with liens and such piling up, we kind of figured it out-we'd been conned.

So we said, "That's it. We aren't going to pay the interest anymore; put us in the bad batch, and let's work this out." So we went and had a meeting with the woman assigned to our workout. She made all the right noises, but called us later and said that she had been in a conference call with the other members of the participating bank group. She told us that typically, the problem is between the borrower and the banks. But in this occasion, the problem was between the banks. They couldn't agree amongst themselves because of an internal dispute over who should be in the better position. So the customer of 27 years was left high and dry.

I want to stress that, at the time when the bank created this contrived default, we were profitable, and we had violated no bank covenants. We were $25 million inside of our maximum loan limit. In other words, if there was a company that was going to get through this, it should have been us. Plus, at the time we had $30 million of unencumbered assets that we could sell and create cash flow-which we were quite prepared to do. We also had about $15 million worth of forward sales that, if they had worked with us, we could have liquidated. So we owed the bank $70 million, we had $15 million in sales, another $30 in assets. We could have reduced that loan much further, and we could have ultimately worked this thing all the way through so that they all got paid back whole, and we could continue in business.

As it stands now, they won't get paid back whole, and we will have to fight to salvage and reconstitute our business. It was because they couldn't agree amongst themselves. One of our rules in the future is that we will never do a participating loan ever again. In my opinion, no builder should ever agree to that. One of the lessons we have learned-and we have learned quite a few-is that when push comes to shove, the banks will abandon their customer.

BB: In your mind, moving through this time of the cycle by lowering appraisals and marking to market is not the way to go? You see the need for fundamental change.

MO: Part of this is that we have one set of rules for banks and another set for business. Go back to the 1980s and the South American debt debacle where countries like Brazil and Argentina were borrowing large sums of money from American banks, which ultimately, they couldn't repay. There was a common-sense workout program created to protect the banks and to maintain the stability of these countries.

Fast forward to the 1990s and the S&L crisis, and as far as the regulators were concerned, it was "let them eat cake." The regulators put together the Resolution Trust Corp., they went in on a slash-and-burn program across the country, wiped out the S&L industry virtually altogether, wiped out many builders, and basically said, 'That's the way it is."

Here we are 15 years later, and they are still playing from that old, failed playbook. What we have to do is educate people that it doesn't work. We have to create a system that protects values, that helps people stay in business, doesn't put them out of business. One that basically acts as common sense.

Our system in place today fails business but protects banks. We need to have a level playing field. They started this mess with subprime mortgages, no-doc loans, and exotic programs that they packaged up and sold to unsuspecting investors. Now they are trying to pretend that this market is someone else's fault.

They wipe out all the builders' and developers' equity in these deals, they protect as much as they can of their own debt, and they say, "We aren't going back in that industry again."

My biggest beef is that they aren't taking responsibility. They are trying to tip-toe off at midnight. It's like the removal van shipping the Baltimore Colts out of Baltimore and off to Indianapolis when no one was looking.

Learn more about markets featured in this article: Los Angeles, CA.