An investment group backed by John Paulson, George Soros, Michael Dell and Christopher Flowers stands to gain more than $3 billion from a bet made on a failed lender during the depths of the financial crisis.

The group's 2009 purchase of OneWest Bank, formerly known as IndyMac Bank, will produce a return of 3.35 times its initial investment, according to people familiar with the deal.

On Tuesday, CIT Group Inc. said it would acquire OneWest for $3.4 billion in cash and CIT stock, the biggest announced bank takeover since 2012.

The investment group bought the bank in early 2009 for $1.55 billion. Including the dividends the group collected from OneWest's earnings in the years since, the investors are due to rake in more than $5 billion.

IndyMac, based in Pasadena, Calif., collapsed in the summer of 2008 as customers grew concerned about its souring mortgages and withdrew deposits. It was the third-largest bank failure in U.S. history.

Regulators at the time were reluctant to allow private-equity capital to flow into the troubled banking sector but ultimately approved the deal. As part of IndyMac's sale to the investment group, which also included Dune Capital Management LP's Steven Mnuchin, private-equity firm Stone Point Capital LP and an affiliate of Robert Leeds's Silar Advisors LP, the Federal Deposit Insurance Corp. agreed to share losses racked up by the bank's portfolio of toxic loans.

In another big transaction, Carlyle Group LP, Blackstone Group LP, Centerbridge Partners LP and Wilbur Ross's W.L. Ross & Co. were among a group that purchased BankUnited Inc. in 2009. The Miami Lakes, Fla.-based lender went public in 2011.

"There was a period you could do it," said Steven Kaplan, a finance professor at the University of Chicago's business school. "There were no strategic buyers who were healthy. It was complete panic."

But private equity's window for deals would soon all but close, as the capital markets reopened to banks and the FDIC imposed new restrictions on private-equity ownership.

In 2012, former FDIC Chairman Sheila Bair said both deals had drawn scrutiny for the windfalls they produced for private-equity firms and their investors. Absent strong bids for other banks, though, the regulator had few choices, she said. Ms. Bair didn't return a phone call seeking comment Tuesday.

Shareholders of IMB Holdco LLC, OneWest's parent, will receive $2 billion in cash and 31.3 million CIT shares valued at $1.4 billion. All seven members of the group have remained investors in OneWest, people familiar with the deal said.

Mr. Paulson is famous for a winning bet against the housing market, which netted his firm $15 billion in 2007. On Tuesday, he told clients Paulson & Co. had contributed $400 million to the investment group, representing a 25% stake. In all, the hedge-fund firm is in line to collect $1.34 billion in stock and cash on its investment, according to a person familiar with the matter, more than triple its initial stake.

Paulson & Co. might retain a portion of its CIT stock from the deal. In a memo, Mr. Paulson told clients he saw "possible further upside" in the lender's shares following the transaction.

"It's good, but I wouldn't call it spectacular," Mr. Kaplan said of the investment group's profit, noting the stock market has more than doubled in the past five years. "The government was worried they'd make 10 to 20 times."

CIT, itself a casualty of the financial crisis, emerged from bankruptcy protection in 2011. The Livingston, N.J., bank specializes in commercial lending, and for years has sought to boost its deposits, which are a steadier source of funding than the short-term debt the bank often issues.

With Tuesday's transaction, CIT will pick up 73 retail branches in Southern California from OneWest. Following the deal's close, CIT said the combination of CIT's banking subsidiary and OneWest Bank under the name CIT Bank will have $28 billion in deposits. CIT shares rose 11%, or $4.76, to $48.71 Tuesday.

The deal also will bump up CIT's assets. After the transaction closes, it will have about $67 billion in assets, making it large enough to be considered "systemically important" by regulators. Banks with over $50 billion in assets are subject to stiff rules on capital and must submit to annual "stress" tests to see how they would perform during a deep recession. CIT had $44.15 billion in assets at June 30.

CIT Chief Executive John Thain recently told investors he was looking for a significant deal so that his firm could jump comfortably over the $50 billion asset level rather than edge over it. That is because the avalanche of regulations that comes with topping $50 billion isn't worth it without a significantly bigger earnings engine.

"If we had grown to just $52 billion, we would be in the worst spot," Mr. Thain said in an interview on Tuesday. "We'd have had all the expense of going over $50 billion but only $2 billion more of assets to cover the expense base."

On a conference call Tuesday, Mr. Thain said he believes that CIT is "well-positioned" to satisfy all of the criteria for being a systemically important financial institution.

On the call, Mr. Thain added he is "confident" the OneWest purchase will be approved by regulators, noting that the deal adds deposits. That should ease regulators" concerns about its balance sheet, he said.

Write to Justin Baer at justin.baer@wsj.com, Saabira Chaudhuri at saabira.chaudhuri@wsj.com and Rob Copeland at rob.copeland@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

CIT (NYSE:CIT)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more CIT Charts.
CIT (NYSE:CIT)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more CIT Charts.