Checkmate for a Wall Street wizard?

When Lehman, AIG, and Merrill Lynch were in crisis a year ago, Chris Flowers could be found at the scene. He survived the maelstrom - but now he has his own billion-dollar problems to worry about.

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By William D. Cohan, contributor

chris_flowers.03.jpg
Chris Flowers
Deal or no deal
Four acquisitions that Christopher Flowers didn't make, and four he probably wishes he hadn't.
He didn't buy ...
Sallie Mae
In 2007, Flowers, BofA, and J.P. Morgan agreed to buy the student-loan provider for $60 a share. When the market started to crack, the buyers balked, then unsuccessfully offered $50. Today shares trade at $10.
Bear Stearns
Flowers was the only bidder other than J.P. Morgan during Bear's frantic final weekend, and he lost out to the giant bank.
AIG
Flowers teamed up with Allianz to offer $10 billion as AIG teetered in September 2008, but never heard back from the company, which accepted a government bailout.
Lehman Brothers
Flowers partnered with BofA to explore buying the faltering investment bank a year ago. Once the government made clear that aid wouldn't be forthcoming, the deal fizzled.
He did buy ...
Shinsei Bank
After making $1 billion on its IPO, Flowers doubled down. He and his investors have since watched their $2.5 billion stake fall to $1 billion.
Hypo Real Estate
Instead of investing directly in this German bank, which had heavy exposure to commercial real estate, Flowers bought on the open market. His fund has lost 80% of its $1.5 billion investment.
HSH Nordbank
After this German bank needed a government rescue, Flowers' investors lost 90% of their $1.8 billion investment.
Merrill Lynch*
* As the investment banker (not an investor) for BofA in its now vilified purchase, Flowers made $10 million for a weekend's work. But he has had to watch his due diligence critiqued even in Congress.

(Fortune Magazine) -- The week of Sept. 7, 2008, started out innocently enough for J. Christopher Flowers. The billionaire, whose eponymous private equity firm invests mostly in troubled financial companies, was in Tokyo to attend a board meeting when he received a call from a senior executive at Bank of America. The executive wanted him to return to New York as quickly as possible to partner in a potential deal to buy Lehman Brothers, which was in increasingly desperate straits.

Flowers flew immediately to New York. By seven on Thursday morning he was studying Lehman's books in a Midtown conference room. Still there 14 hours later, Flowers got a call from an executive at AIG inviting him to lunch the next day with Bob Willumstad, the insurance giant's then CEO. At lunch Willumstad showed Flowers a piece of paper revealing that AIG's cash balance would be a negative $6 billion within days and a negative $25 billion a week after that. Flowers began plotting ways to avert a collapse, but despite trying to enlist Warren Buffett and others, he couldn't put together an acceptable proposal. He was, however, the one who pulled aside then-Treasury Secretary Hank Paulson -- the two had worked together at Goldman Sachs -- and alerted him to AIG's looming crisis.

Before the weekend was out Flowers found himself immersed in yet another deal, one that may prove to be the most controversial financial merger of recent years. On Saturday morning, while top Wall Street executives convened at the New York Federal Reserve Bank to try to save Lehman, Flowers met with Bank of America's executives, who dropped another bombshell. BofA was no longer kicking Lehman's tires. "We want to buy Merrill Lynch this weekend, and we need your help on that," they told him. Flowers, who occasionally moonlights as an investment banker (especially for old clients such as BofA), signed on.

During the week last September when it seemed as if the world's financial system was imploding, Flowers, 51, found himself at the epicenter of the frenzy. Whether it was at Lehman, AIG (AIG, Fortune 500), or Merrill Lynch, he was nearly as omnipresent as Hank Paulson. Flowers describes his days of shuttling from crisis to crisis as "like being at D-Day."

That was hardly the first time Flowers had turned up at the sickbed of a giant financial entity. He has an uncanny knack for popping up in the midst of calamities. The student loan company Sallie Mae and Bear Stearns are just two of the other ailing operations he has bid on -- but not acquired -- in the past 18 months. Indeed, that may be Flowers' most striking trait as a dealmaker: He has the unlikely distinction of being most famous for the deals he hasn't done.

Of late, however, it's the ones he did do that have been dogging him. Flowers is struggling to salvage a series of ill-timed investments that he made just before the financial crisis got really ugly and dragged already distressed institutions down further than he thought possible. His billion-dollar stakes in Japan's Shinsei Bank and in Hypo Real Estate and HSH Nordbank, both in Germany, have crumbled.

Flowers' $7 billion second fund is down between 60% and 70%, according to estimates from knowledgeable sources. (Flowers declines to say.) And some of his biggest bets, such as Hypo and HSH, are unlikely ever to make his investors whole.

To be sure, Flowers can take consolation in a reported $1.5 billion net worth. Still, it has to be humiliating for a renowned brainiac accustomed to one success after another at the highest levels wherever he has competed: chess, Harvard, and Goldman Sachs (GS, Fortune 500), where he was once the firm's youngest partner at age 31. After all, he personally pocketed about $1 billion on his first big deal as a private equity investor -- Shinsei Bank, ironically -- only to see that triumph evaporate, along with his investors' money, as the bank's fortunes turned.

As sterling as his résumé is, one question is inescapable: Is Flowers a one-hit wonder as a private equity investor? Or is he just suffering a miserable year in the midst of one of the most disastrous periods ever for the sorts of investment he specializes in? "I did not foresee the cataclysm that was going to happen," Flowers says of last year's meltdown. Fair enough -- many didn't. But it's far from clear that he'll be able to mount a comeback.

Before the descent, it always seems, comes hubris. It would be hard to find a clearer example than Chris Flowers, a man who seems reserved to the point of timidity, but who on a few occasions has issued the sort of brash proclamation that you'd associate with the likes of Donald Trump. Behold Flowers, for example, in June 2008 telling investors in his $7 billion fund that "every single investment will make money." Every single investment! Bear Stearns had collapsed a few months before, and asset prices of financial institutions seemed to be at their nadir. Flowers pronounced it the "Super Bowl of investment," adding, "It's no time to be sitting in the bleachers."

Then, in February of this year, Flowers told a Manhattan conference titled "The Big Fix" that "lowlife grave dancers like me" will make a "tremendous fortune" from the detritus of the collapse of numerous financial institutions. He asserted that "governments everywhere -- this government and around the world -- are going to own a lot of stuff, and they are going to be not very adroit, not very commercial."

Sheila Bair, chairman of the FDIC, was miffed by Flowers' braggadocio. And another of Flowers' moves may only irk her more. Flowers personally bought a tiny bank in Missouri last year, sight unseen. The sole purpose, some believe, was to circumvent rules that the regulator has been considering for how private equity firms will be permitted to invest in failed banks. So today Flowers is chairman of the former First National Bank of Cainesville, with $17 million in assets, which he not so humbly renamed Flowers National Bank. ("Grow with us" is the new slogan.) "He bought that bank for just one reason: If you have a bank charter, you can apply to get on the FDIC failed-bank distribution list," says someone who knows him.

Given the FDIC's current power in selling off bankrupt banks, alienating its chairman is not a wise move. "He's a pariah in D.C.," says one private equity investor. (Through a spokesman, Bair declined to be interviewed.)

Flowers knows he has rankled the FDIC. And while contrition is not an emotion he wears well, he is feeling it. He says he has opened a diplomatic front with Bair and is trying to make amends. "It is in our interest to have low-key, smooth relationships with government and regulators," he says. "Our aim is to be understated and low key and noncontroversial."

By all appearances, he is fully implementing that policy. With a newly hired PR representative seated next to him in his office on Manhattan's Fifth Avenue, he shies away from all but the blandest observations. Indeed, meeting Flowers in person, it's hard to imagine him in Trump mode. His horn-rimmed glasses give him an owlish look, and his distracted intellectualism suggests an academic rather than a corporate buccaneer.

Flowers has the patrician pedigree of the old-school Wall Street banker; he's the antithesis of the back-slapping fraternity-brother type. Sure, he enjoys outdoor activities: He likes to sail near his vacation home in North Haven, Maine, and he recently returned from a sailing trip off the coast of Croatia. But it seems no accident that he prefers chess -- a contemplative, intense mind teaser of a pastime -- to the social staples of banking, golf and tennis. As he puts it, "There is no man in America less interested in sports than me." When he first started at Goldman Sachs, he recalls, he was nervous that his lack of sports knowledge would make him an outsider at the firm.

Flowers may appear nerdy, but he has a quirky charm. And his low-wattage exterior belies a steely determination, whether at the chessboard or in the ongoing battles among Wall Street alpha males, that has served him well. He may not be outgoing, but he's the sort of person a top executive can feel comfortable trusting. "I like someone who is 24/7, always reachable, keeps their cool, thinks through problems carefully and as a partner," says James B. Lee Jr., a vice chairman at J.P. Morgan Chase who has worked with Flowers in myriad capacities and whose company is a limited partner in his funds. "He's a very, very good and natural partner."

Flowers wasn't present at the Sept. 15, 2008, press conference announcing BofA's acquisition of Merrill Lynch. But his name was invoked repeatedly, and today he probably wishes it had never been uttered. BofA CEO Ken Lewis cited Flowers' conclusion that Merrill had "a much lower risk profile" than it had the year before. Flowers, he continued, "was very complimentary" of the actions taken by Merrill CEO John Thain to strengthen the company's finances.

Initially hailed as brilliant, the BofA/Merrill merger has come to be viewed as a disaster, with revelations continuing to emerge about everything from the toxic surprises lurking among Merrill's assets to hefty bonuses for some Merrill employees to the extraordinary pressure Paulson and Ben Bernanke, the Fed chairman, put on Lewis to complete the transaction. Flowers suffered the indignity of having his work dissected in a congressional hearing, with Rep. Dennis Kucinich (D-Ohio) questioning whether "Ken Lewis's management team failed to do due diligence," and Paulson acknowledging he was aware of such criticism.

The more fundamental question, for those outside Washington, is, Why did BofA agree to such a high price for a company on the verge of bankruptcy? Flowers didn't negotiate the terms, but he played a major role: As the key adviser, he endorsed the bank's decision to pay a 70% premium for Merrill's shares. And he issued a "fairness opinion," certifying that the price Bank of America (BAC, Fortune 500) was paying was justified. (For that work, which took a single weekend, Flowers was paid $10 million, with another $10 million going to Fox-Pitt-Kelton, a small investment bank in which he owns a stake.)

For his part, Flowers says Lewis never asked him to update his original fairness opinion to reflect changes in Merrill's circumstances, and never consulted him again about the deal after that weekend. He says he and his team valued the Merrill assets as well as they could with the information available. Although Flowers had only a weekend to comb through Merrill's financials, he was actually steeped in them: He had reviewed the books nine months earlier when Merrill was raising capital and Flowers (this time as a private equity fund manager) was considering an investment. Flowers passed then -- the price was too high, he says -- but kept tabs on Merrill and noted that through the course of 2008, the firm raised billions in capital, sold a $30.6 billion chunk of troubled assets to Lone Star Funds for 22˘ on the dollar, and sold its stake in Bloomberg LP for around $4.5 billion. But those moves, it would later become clear, were not enough.

The fiasco has been a black eye for Flowers, who takes pride in maintaining the prestige of his old role as a mergers-and-acquisitions adviser even as he focuses on investing for his private equity fund. Flowers defends his reasoning. He asserts that Lewis coveted BofA and that, since it was an all-stock transaction and BofA's share price has fallen, the cost was dramatically lower than if BofA had paid cash. In sum, he says, "I thought it was a reasonable price."

How Flowers, the scion of a once-wealthy timber, banking, and baking family with roots in Alabama, became the Zelig of finance is a story of drive, intelligence, and a little serendipitous timing. Born in California, Flowers moved to Weston, Mass., a suburb of Boston, at age 6, when his father retired from the Navy and took a job as an administrator at Harvard Business School. His mother grew up in Queens, N.Y., and dropped out of Barnard College to get married. She was 18; her fiancé was 30. She eventually got a master's degree and became a children's librarian (and a leader in the field).

In high school Flowers was a math whiz and a chess champion. He showed at least hints of a mordant sense of humor, choosing as his yearbook tag line the quotation "The horror, the horror" from Joseph Conrad's "Heart of Darkness" (this was several years before the movie "Apocalypse Now" propelled the phrase into the pop culture lexicon). Flowers went off to Harvard, where he majored in applied mathematics. There, he says, "I found people at Harvard who made me look like a moron at math." Flowers knew he wanted to go into business. His father, who died when Flowers was 21, had told him, "If there is one thing you should do," it is to go to Harvard Business School.

He didn't follow his father's advice. Instead Flowers got a summer job at Goldman Sachs after his sophomore year, courtesy of a Harvard classmate whose father was the prominent Goldman partner Arthur Altschul. After graduating from Harvard a semester early, Flowers joined Goldman full-time in March 1979, working as an analyst for partner Steve Friedman in M&A. "The first thing I learned at Goldman was how to work hard," he says. That first year he worked "365 days straight," and Goldman paid him $16,000. He says he also learned how to "sell," the mundane but crucial aspect of investment banking that requires bankers to persuade clients to hire you and your firm rather than someone else and his firm.

Flowers bloomed at Goldman. The firm asked him to forgo business school and become an associate but didn't increase his pay. "I remember being irritated," he says. He was invited into Goldman's nascent financial institutions group as the M&A guy and quickly shone. By 1988 he'd been named a partner at the tender age of 31, the youngest at the time to attain that distinction.

Flowers was extraordinarily successful at Goldman. He thrived as he worked on many marquee transactions in financial services, including the NationsBank/Bank of America merger and Norwest's takeover of Wells Fargo.

But his tenure at Goldman ended with a thud in 1998. His mentor, then-chairman Jon Corzine, had been pushing the idea of an initial public offering. Flowers was a key architect of the technical aspects of the proposed IPO. Goldman's partnership voted in favor of the idea. But in the wake of the collapse that fall of Long-Term Capital Management and increasingly shaky market conditions, the management committee chose to shelve the IPO. Flowers decided to leave Goldman that November. Two months later four of the six members of the management committee, including Paulson and John Thain, voted to oust Corzine.

Flowers was "an ambitious guy, not in a bad way, who wanted to move up in the firm," says former Goldman vice chairman Robert Steel, who was one of Paulson's deputies at both Goldman and the Treasury. As Steel sees it, Flowers made one "big bad bet" on Corzine, and once Corzine lost the IPO battle, "Chris ran out of runway at the firm."

Flowers concedes the point. "The politics of it had been very bitter and divisive and ugly," he says. He quickly came to the conclusion that "the future was not bright for me there" and decided to take his growing fortune and move on. He and Corzine, now governor of New Jersey, remain close; Flowers manages some of Corzine's considerable fortune. (Corzine did not respond to requests for comment.) Flowers takes solace in the fact that Goldman soon reversed its decision and approved an IPO, which, among other things, left Flowers with hundreds of millions of dollars of Goldman stock.

By the time he left Goldman, Flowers had already decided to use his M&A expertise and knowledge of the financial industry to become a private equity investor. Almost immediately he began putting tremendous energy into figuring out how to buy a Japanese bank. Flowers says his experience in the savings-and-loan crisis of the 1980s convinced him that buying banks when they were down and out could be extremely lucrative. And after Japan's so-called lost decade, the country was stocked with numerous "zombie banks" ripe for turnarounds.

A mutual friend introduced Flowers to Tim Collins, a former Lazard banker who had formed a private equity firm, Ripplewood Holdings, and also happened to be intrigued by Japanese banks. Collins gave Flowers office space at his firm, and eventually they set their sights on Japan's ailing Long Term Credit Bank (LTC). Flowers scrubbed the books and in a computer spreadsheet projected the potential for 70% annualized rates of return. He has framed his handwritten analysis from March 1999 as a reminder of the light-bulb moment. He knew he was onto something.

But the obstacles were daunting. For starters, there was a diplomatic challenge: The Japanese government had never permitted Americans, let alone private equity investors, to buy a bank. Then there was the financial one: how to acquire LTC without drowning in its sea of bad loans.

Collins and Flowers turned out to be perfect partners. The two couldn't be more different -- Flowers is ascetic; Collins, colorful -- but each played his part. The two assembled a cadre of financiers including powerhouses like GE Capital and Citigroup (C, Fortune 500), while bringing in players with diplomatic credibility, such as David Rockefeller; former Federal Reserve chairman Paul Volcker; and former Exxon (XOM, Fortune 500) and Citibank executive Masamoto Yashiro (who would become CEO of LTC after it was acquired). Collins then deployed his team in the sensitive negotiations with Japanese officials. Meanwhile Flowers focused on the minutiae of the deal's complex structure and devised a mechanism that ensured the bank's bad loans would stay with the Japanese government.

Ultimately Collins and Flowers persuaded the Japanese government to sell the bank to their consortium of 12 major investors for $1.1 billion in March 2000. "Getting the deal done was a great collaboration," Collins says, "and without any one of [our partners], it probably wouldn't have happened." When the deal was announced, Collins and Flowers were invited to visit the Japanese Prime Minister at the Diet, the Japanese parliament.

In February 2004, after years of hard work fixing the bank, renamed Shinsei -- "rebirth" in Japanese -- the investors launched an IPO. So lucrative was it that David Rubenstein, co-founder of competitor Carlyle Group, dubbed it the "most successful" private equity deal in history. On the first day of trading the stock jumped 58%, valuing the bank at almost $10 billion, a return at that moment of nearly 10 times the original $1.1 billion investment. It is generally accepted that Collins and Flowers each made around $1 billion, though neither will discuss his payday.

Collins, who extracted all his money over time, had to share his fortune with a few investors, plus pay the overhead for Ripplewood (which has most recently been in the news because its entire $275 million investment in Reader's Digest was wiped out in that company's bankruptcy filing).

Flowers, who took out only about one-third of his profit at the time of the Shinsei IPO, did not have to share his haul with anyone, since he had no fund at that time. The two partners ended up parting ways over the bank's strategic direction but remain friendly, despite reports of a tiff. (Flowers is planning to visit Collins at his Adirondacks "camp.") In his first big deal as a private equity investor, Flowers had reached the pinnacle. But he would soon find defeat in the very company that had provided his triumph.

The extraordinary success of the Shinsei IPO transformed Flowers into a rock star in the private equity world. He quickly raised $900 million for a debut fund in 2002, and then $7 billion for a second fund in 2006, the most money ever raised to invest solely in the financial services sector.

Flowers didn't look far for investments. Not only did he keep most of his initial investment in Shinsei, but he also used his investors' cash to buy more stock before the IPO, more soon after the IPO, and still more in November 2007. When all was said and done, Flowers and his investors had sunk $2.5 billion into Shinsei. But even as he did that, the bank was pouring billions into asset-backed securities and collateralized debt obligations. The losses mounted, and Flowers watched as Shinsei shares tumbled.

Today that holding, which represents about 33% of the company, is worth around $1 billion. Flowers says he does not regret keeping -- and then adding to -- his position in the Japanese bank. "I believe that Shinsei has a very good long-term future, and I expect that we will see that emerge over time," he says. Flowers just brought back the bank's former CEO and orchestrated a merger with Aozora, a Japanese bank controlled by Cerberus, the U.S. private equity firm. And perhaps there are already some hopeful signs: On July 31, Shinsei reported its first quarterly profit in a year -- $55 million.

Flowers is reluctant to be specific about his funds' other holdings. He has investments in eight banks across the globe: Hypo Real Estate and HSH Nordbank in Germany; IndyMac and Flowers National in the U.S.; Shinsei in Japan; NIBC in the Netherlands; OJSC Investtradebank in Russia; and NBFC Sicom in India. He also owns the stake in Fox-Pitt-Kelton (which Macquarie Group is reported to be bidding for) and pieces of other small institutions.

The IndyMac transaction is revealing in its own way. Flowers is part of a group of private equity firms that agreed to buy the failed savings and loan -- now OneWest of California -- from the FDIC last fall (before Flowers made his comments about being a "grave dancer"). But Flowers was so sensitive to the dismal results he has been generating that he offered some of his investors a special arrangement: They could invest directly in IndyMac rather than through Flowers' fund. That means those investors won't have to pay management or success fees on that investment. When a fund manager voluntarily eschews his 2 and 20, you know he has some angry customers.

The list of deals that Flowers explored but didn't complete is long. There's Lehman; AIG; Bear Stearns; Refco, the scandal-tarred commodities trader (now part of MF Global (MF)); Northern Rock, the troubled British bank; and Friends Provident, the British insurer.

Most infamous, though, was his proposed $25 billion takeover of Sallie Mae, the student-loan provider, in April 2007. The Sallie Mae deal was to be Flowers' largest and most audacious. But when the market began to crack that summer, Flowers and his consortium, including J.P. Morgan Chase (JPM, Fortune 500) and BofA, invoked the "material adverse effect" escape hatch in their agreement (they cited legislation that would change the rules on student loans) and then tried to bail out of the $60-per-share deal. Flowers then made a new offer at $50, only to be rebuffed by Sallie's board. Acrimony, lawsuits, and bad press followed.

Flowers looked to be on the hook for the bulk of a $900 million breakup fee until the parties settled, with J.P. Morgan and BofA agreeing to lead a group of banks in refinancing a $31 billion credit line for Sallie Mae. Flowers emerged with a tarnished reputation -- but at least his investors were spared disaster. The shares, which he once agreed to buy at $60, now trade at around $10.

Flowers' worst mistake came in a deal he did close, just before his June 2008 comment about the moment being the "Super Bowl of investment" opportunities. In May his fund (along with Shinsei) led a $1.5 billion tender offer to acquire 24.9% of Hypo Real Estate Holding, a Munich-based commercial real estate lender. The Hypo shares were faltering, having fallen close to two-thirds in the months before Flowers' tender offer. But Flowers still paid a 25% premium. Even stranger, Flowers bought the shares in the market rather than directly from the company, which was short of capital. This seemed like a monumental miscalculation. "That was what the company wanted," Flowers says. "At that time they felt they didn't need capital. And they were wrong, and we were wrong."

That's an understatement. After Lehman failed and financing markets seized up, Hypo's Depfa Bank subsidiary, based in Dublin, could no longer obtain short-term loans. Hypo sought assistance from Germany's bank-rescue fund a mere four months after Flowers made his investment, incurring political wrath in the process. The German government ended up owning 90% of Hypo, drastically diluting Flowers' stake. In a year he has lost about 87% of his $1.5 billion investment. Hypo "has been the most difficult experience we've had, and is a big loss and was a mistake," he says.

His other German investment is a 27% stake in HSH Nordbank, bought nearly three years ago for $1.8 billion. After a $4.5 billion government rescue in May, Flowers' position has been watered down to 10.7% and is no longer publicly traded. He did own an insurance company in Germany, Wuba, which he sold to AIG in August 2007 for an undisclosed amount of cash. "We did very well on that," he says, though he declines to provide specifics.

Even in his private life, it seems, Flowers couldn't avoid buying at the top of the market. In 2006 he paid $53 million -- still the record price for an individual property in New York City -- to buy the Harkness mansion, a century-old, oversize limestone townhouse on East 75th Street. He then reportedly spent another $15 million or so gutting and renovating it. Earlier this year he quietly put it up for sale at a discount -- a steal at $49.95 million -- because he and his wife are splitting up. So far there's no sign of takers.

Like more than one founder, Flowers is synonymous with his 40-person firm, which is officially known as J.C. Flowers & Co. But Flowers still loves to get personally immersed in deals -- he's anything but a delegator. He enjoys a detailed dive into the numbers. "I have found that to be one of the single most useful things you can do," he says.

It's precisely this notion that Flowers is a solo chess player rather than a team quarterback that his critics -- who hide behind the cover of anonymity -- cite as an explanation for his recent failures. "The firm revolves around him," explains one banker. "He never built a team. There is no real process, no real investment committee. There's just Chris." Flowers rejects this characterization, not surprisingly, and he insists he has an able team of senior bankers who are deeply involved in his projects.

Despite Flowers' slumping investments, he remains a powerful force in his investing niche. And he has a legion of impressive fans. Says Gary Parr, a Lazard banker who is both a onetime competitor and Flowers' partner in the successful Fox-Pitt investment: "I trust him as much as anybody I know, and that's worth a lot, to know that you can trust somebody to do what they say they will do, or to say I'm not going to do it and walk away with clarity."

Nobody doubts Flowers' brainpower. No less a judge than Warren Buffett tells Fortune, "I think he's a smart guy." (Buffett spoke with Flowers during the attempt to rescue AIG.) But is intellectual firepower enough? "He did one great assisted transaction in Japan," observes another banker, "and off that he raised $7 billion. The great failing in private equity is to assume that you can repeat the past. I think he just assumed, for instance, he could repeat Shinsei over in Germany. Big mistake."

Flowers is facing increasing resistance from investors. Last year he set out to raise $7 billion for his third fund but attracted only $2.5 billion. And some of his investors are trying to defect. They have been shopping their stakes to raise cash. But it has been rough finding buyers at anything resembling an attractive price, a clear sign that the market is not confident Flowers will be able to salvage much value in the second and third funds. Says one investor who buys and sells limited-partner positions: "In portfolios we have looked at, we have assigned zero value to [investments in Flowers' second and third funds]."

Fortunately, Flowers has plenty of cash to deploy. His third fund still has around $2 billion, plus a potential $3.6 billion from Chinese Investment Corp. and others. There remains a near flood of investment opportunities in a financial sector still desperate for equity. "The number of companies that need capital is unusually large," he says.

Flowers ventures optimism about Shinsei but otherwise restrains himself when it comes to talking about the future of his other holdings or what he might invest in. As you might imagine, he's not making any new predictions these days.

--Writer-reporter Telis Demos contributed to this article.

--An earlier version of this article incorrectly asserted that Masamoto Yashiro was a former chairman of Mitsubishi. Fortune regrets the error.  To top of page

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