FUnny thing is that he will go do the same thing again in 15 years and the banks will lend him the money. It is always the xeperience not track record.
Looks like the wealthy are starting to feel the pinch.
Michael Jackon's Neverland Ranch is in foreclosure too.
At first, some thought Neverland was worth $12 million, but it is only worth about $6 million, according to the Santa Barbara County assessor.
Title documents (public information notice of default) claim that Michael Jackson is delinquent on a little more than $200,000 worth of mortgage payments. Its a $23 million loan. So foreclosure proceedings have begun. (Link)
_
Reuters Thursday January 31 2008
(Adds Florida subpoena, Countrywide comment, updated shares)
By Jonathan Stempel
NEW YORK, Jan 31 (Reuters) - Bank of America Corp said that Countrywide Financial Corp's second-highest ranking executive would run its mortgage business, and a large Countrywide investor said it opposes the bank's $4.4 billion purchase of the nation's largest mortgage lender.
Also Thursday, Florida Attorney General Bill McCollum said his office issued a subpoena on Jan. 17 to Countrywide for documents, as part of a broader probe into possible unfair and deceptive practices by lenders that offered subprime mortgages.
Bank of America said David Sambol, Countrywide's chief operating officer and top official other than Chief Executive Angelo Mozilo, would run its mortgage unit after the merger.
Sambol became Countrywide's COO in September 2006 after the sudden departure of his predecessor Stanford Kurland.
Though Countrywide lost more than $1.6 billion in the second half of 2007, Bank of America Chief Executive Kenneth Lewis said on Jan, 11 he wanted to retain some senior executives, whom he called "very, very good operators."
We're all AAA, now... and "very, very good operators."
Neverland is not in foreclosure - Ron Burkle stepped in and "asked" the lender to give the Gloved One some more time - best bet is another 30 days - begs the question as to why Burkle doesn't just lend him the money....
I suspect someone at Deutsche Bank is going to have some explaining to do the the board. I can see it now - "This is investment banking, NOT subprime. We don't do NegAm without some collateral."
CR, I can't imagine that this deal has anything in it like a non-recourse clause (if so, that person or persons at Deutsche Bank is really going to get spanked). Any rumors of Macklowe being held liable for the difference or looking to declare bankruptcy? I seem to fuzzily recall many such suits having happened in the S&L days.
I doubt Macklowe ever expected to pay back the loan. My guess is he just wanted to tell people at cocktail parties he got a $7.6B loan for a $6.8B purchase with only $50M down. Nobody in their right mind would ever believe him, though. By the way, my guess is also that the $50M downpayment was some of his "friends" money. Not his. Glad I'm not his friend, because, god knows, I'm a sucker for giving money to a guy who names his kid "Billy."
I know, I know, ego and perverse incentives rule the world of high finance. Still, this one was at a BritBrit level of crazy. 100%+ LTV and (AND!) neg-am on $7,200,000,000? Hello?
Macklowe let his near free option expire. $50m down? He'll get that much back in tax offsets alone. I've watched this deal and it never made any sense from any perspective including fantasies of breaking rent control and problem free NYC redevelopment.
Clearly the plan a year ago was to serial refinance while plumping and disposing of various properties to service the remainders then August happened.
Do you know if any of the huge charges we've seen relate to reversals from Gain on Sale transactions? It hasn't been highlighted if they were. Shouldn't there be a ton of these?
REBear - here's how. Start in a position of privilege. Bet the farm during bull markets. Make a killing. Keep betting the farm. When times get tough (the times that require thinking, as opposed to bullheadedness) lose so much money that people think you are such a player that they'll cut you some breaks, and then let you right back in the game later when the next bull run comes around. It's an insiders game, and the only trick is finding the ticket to enter the fixed game.
Do you know if any of the huge charges we've seen relate to reversals from Gain on Sale transactions? It hasn't been highlighted if they were. Shouldn't there be a ton of these?
Donald Trump is a personal hero of mine. I certainly hope you are not implying that he is a numbskull. Because, that is a false claim. You shall be stricken from this earth for such heresy.
Before you get too down on Deutsche Bank and Fortress (the mezz lender), don't forget this loan was cross-collateralized against the rest of Macklowe's New York portfolio. He has some very choice assets (that still have equity) including the GM building. I have heard that GM building is being marketed and that bids are coming in very high ($4-5b). I can't argue that the banks won't lose money on this deal, but there is a lot more going on than what gets reported in the MSM.
This was not a "negative amortization" loan in the strictest sense (i.e. unpaid debt service gets added back to principal). It did not have an accrual feature.
The term "negative debt service", as used by the writer, just refers to the fact that cash flow was not sufficient to cover debt service. Dumb terminology but whatever.
The loan had a debt service reserve in place to cover the shortfall.
Glad to see everyone is abandoning bad investments, and negative equity. But hey, maybe Macklowe just did it to spend more time with his family. I wonder if this will effect his fico score.
Isn't there a tipping point (in the Malcom Gladwell sense) aspect to jingle mail?
I can just see there being some point where enough people have performed jingle mail that there's no disincentive to perform it yourself because you'll look just like everyone else in 5-10 years when you try to borrow again (i.e. you have a default from "that crazy 2007-2008" time period.
Have we hit that collective action / tipping point yet?
Spending time with your family only affects your FICO score if spending time with your family involves buying $6.8B worth of property with a $7.6B loan with $50M down. Otherwise, you should be safe.
What's going on now with MBIA and Ambac is one of the all-time financial soap operas.
These companies have almost no chance to survive as going concerns. But apparently, it serves some interest for them to talk tough and buy time. The ratings agencies are being pressured by somebody to hold off YET ANOTHER DAY. Maybe MBIA and Ambac are being pressured by somebody, too. With free will, I wouldn't have delivered the same call the MBIA CEO did today. It was dishonest and may come back to haunt him. It didn't help him or MBIA much. But it helps SOMEBODY.
Strings are being pulled behind the scene. It's almost like...how many people can Moses get out before the Red Sea crashes down?
Today's events were all bearish, in my book. Time is running out.
Didn't Macklowe do stuff like demolish buildings with tenants still in them a while ago. I might be wrong about the specific, but there was some pretty egregious behavior on his part.
I agree w/your assessment about Moses and the Red Sea.
For all of the crap about Bernanke, he wasn't at the rudder for years and he is, in a sense, a bagman. Was reading a history of the Korean War and an author noted that some of the most difficult leadership involves getting as many out of danger while holding a rear-guard action. All of this does smack of rear-guard...
So lower as far as possible and let as many as possible refi (or whatever) in order to hang on.
Thanks Dunham, I looked him up, links above. After the illegal demolition, there was a fire (two fires in the building broke out simultaneously) in an adjacent building Macklowe owned, and two squatters barely escaped.
People don't offer $1b in personal guarantees if they actually have $1b in attachable assets. Macklowe is swimming naked and about to be ummm... exposed.
Rich,
Everything that happens in the financial markets is perfectly legitimate. There are no manipulating forces as that would be illegal and/or unMerican.
George W. Bush
Not sure I understand the effects of "this deal"...
Did they leave his name on the buildings for the sole purpose of avoiding the transfer taxes? What reason is there to keep him involved at all? Hasn't he already proved himself unworthy?
How can the lender ever become whole again, given that we can expect rents to go down (and vacancies up) in this recession that just started?
ShortCourage,
There are going to be a lot of 2% and skim lenders out there. Won't be enough cream around to for many to be whole.
The National Dairy Council on Lending
If the lender/lending group forecloses on Macklowe that potentially sets off a 3.0% transfer tax. On $7.6 billion, that is a big number.
By keeping title in his name, they avoid that, and will just have to deal w/ it when they sell, rather than twice.
Regarding his management, Macklowe is regarded as one of the better commercial landlords in New York City, and knows the buildings.
His play was to roll this loan while leases expired over time. Couldn't get the refi done and here we are. Has nothing to do with mismanagement in this case - there isn't that much vacant space, it is purely a value play (under market rents in the building, increasing rents in NYC, etc.).
Dunham,
The problem I have is calling anything a "value" play when rents have spiked, a recession looms, and people are betting that rents (or real estate) "always go up." I call it a "risky" play with very bad odds. Funny how it didn't work out well.
Homebuilders (some of them) will start making money again someday? Another reason to start buying in anticipation.
There will come a time when America will need quantities of new homes built. But it's years away, and only 2-3 of the large public builders will last until then. They will be much, much smaller.
Any company could become a homebuilder. Warren Buffett could start homebuilders from scratch. You only need two things: land and credit. But none of the large public builders will have them. So, the next wave of building will be led by smaller, nimbler, newer companies.
Not one of the large public builders planned smart or guessed right for this cycle, which won't forgive them.
LONDON -- Standard Chartered PLC said it will take a $7.15 billion structured investment vehicle it manages onto its balance sheet, in a move it says shouldn't materially affect its 2008 earnings or liquidity position.
The U.K.-based bank, which makes most of its profit in Asia, said it will provide a backstop liquidity line on Whistlejacket Capital Ltd.'s $7.15 billion in outstanding senior debt. By selling off assets, Standard Chartered has reduced the size of the vehicle, which was $18.2 billion as of Aug. 31
Rich,
Actually the problem with the homebuilders is they have too much land and they are running out of credit. But, otherwise you are right, they are screwed.
I agree, I was being sarcastic. Tough day in my account today, so a little bitter. Already dreading the inevitable 4.7% unemployment reading with 100k+ payroll. Can't believe the run-up in HBs.
This may be for the drinking inclined or get you that way - I think this is an update from the last go round - Fed non-borrowed reserves declined (increased?) anyways went more negative by ~74%...not my area but some folks care to comment? Non-borrowed reserves almost doubled to -2424?
Rich,
Actually the problem with the homebuilders is they have too much land and they are running out of credit. But, otherwise you are right, they are screwed.
Elvis,
They will be forced to use land to pay back credit, in the same way jewelers will have to melt bracelets into gold to pay back credit.
In the end, they will have very little land or credit left.
Look at financials AH. On a run. This action reminds me of the '07 Apr- early June time frame last year. I got clobbered and driven out of my short positions over time, hanging on to my LT options. I eventually recovered and then started to smile but I got discouraged because there was absolutely no reason for the pounding. Every bit of economic market information contradicted the rally. I can't go through another 2 month long drubbing.
At least I'm 40% hedged, and the hedges are beginning to work.
I am not sure how many readers here have seen this article from yesterday, but my mind is still trying to wrap around the application of the work "Simulacra and Simulation" to the current financial markets. Cuts to the heart of the monoline insurance scam.
so he put down 0.6% of the purchase price to own these properties. that's not "equity" that's option money. option has now expired, so walk away.... can't believe banks were funding these types of deals. dopes.
As I read somewhere else today: A bear market must keep moving or it dies.
That has to include lots of up days to eventually sell into. If I'm sitting at Goldman's prop desk tomorrow I want to see how high we can run things with light commitment, e.g after the jobs number...before slamming the whole show when nobody expects it. Why sell at a low price when you have fools like Cramer ensuring you can sell at a high price?
One of my own favourite quotes, from Benjamin Franklin:
"He that can have patience, can have what he will."
"CR, I can't imagine that this deal has anything in it like a non-recourse clause (if so, that person or persons at Deutsche Bank is really going to get spanked). Any rumors of Macklowe being held liable for the difference or looking to declare bankruptcy? I seem to fuzzily recall many such suits having happened in the S&L days.
--Andrew | 01.31.08 - 5:09 pm | # "
The Deutsche Loan is non-recourse. His problem is the Mezz from Fortress. That is where the guarantee and the pledge of his other collateral is. Fortress can step into his shoes on the Mezz but they would have to cure the senior loan. They may decide that they have enough collateral in the other properties and their interest in the Mezz is evaporated and just jet. It's not likely that they will but it's a possibility.
"Mr. Macklowe pledged a personal guaranty of $1billion for that loan as well of his interests in 12 other properties,"
Now that's recourse...
Allen C | 01.31.08 - 7:43 pm | #
Exactly. The Deutsche Loan was a 5.8Bn Senior on roughly 7.1Bn transaction so it's in the 80% LTV range. The loan may be closer to 90% or 100% LTV now but hey, that's the market. The Fortress Loan was secured by a pledge of the equity in this portfolio and an additional 12 or so properties. The interest in the GM building alone could make them whole. How anyone says this is a completely stupid loan that is 100% financing is beyond me. Pledging the equity in assets counts as additional collateral...for realsies.
Now follow the MACD line at the bottom over the year. Each cross has been a reliable indicator of the move in the DOW. This bull may still have some time to run....
Following up on your comment, my question is, what does Fortress do now? Can they force asset sales from his existing portfolio or do they have to wait until DB liquidates the EOP assets?
Tanta:
"Do you know if any of the huge charges we've seen relate to reversals from Gain on Sale transactions? It hasn't been highlighted if they were. Shouldn't there be a ton of these?
No . . . why should there be a ton of those?"
How could their repurchase liabilities not be greater than what they reserved?
This should be great news for the market tomorrow. More stuff to sell or resell. Perhaps a few lawsuits. All adding to the GDP going into the 3rd qrt. Hooraah.
JJL: Simulacra and Simulacrum. Interesting, but a lot of hooey. The constant attempts to make something culturally new out of "jingle mail" miss the economic reality of the borrowers. The size of the house debt in relation to other household income and indebtedness is higher than ever experienced in the past, and in declining markets (not rising as in the rating agencies' subprime models). Americans are rational. Faced with negative interest rates, they will make leveraged investments in (currently) appreciating assets. Faced with unmanageable debt secured by depreciating assets, they will disinvest (jingle).
As A. J. Liebling once said of Hearst (speaking of his Atlanta losses), "The prerequisite for losing $21,000,000 is not genius; it is to have $21,000,000".
Well they can't do it yet as he hasn't defaulted. I am not 100% sure how the collateral pledges inre: Fortress are structured but I am willing to make an educated guess that they could take the extra security (equity in the 12 other properties) and try to sell it to satisfy the debt. Given the market, I'm not sure that this is the best approach but I don't have the specifics of what the security is for the loan who knows, there could still be a lot of equity in there.
One thing that no one should discount is the refusal of Macklowe to go easy. I have seen stuff like this drag on for quite some time on lesser grounds but trying to predict what happens if and once you get to court is a bad business to be in.
Macklowe ain't dumb. If Fortress missteps or tries to take control of the GM building this will quickly end up in court, and it'll get real complicated there.
A lot of high stakes poker going on behind the scenes, and hard to say how it all plays out, but it won't be fast.
GM Building should be good for $3.5 billion easy (no more than $2.5 billion of debt on it - i think less), possibly as much as $4.0 billion.
The real question is who is going to pay $7.6 billion for these assets? Even $6.6 billion is probably a stretch considering what he paid for the portfolio in the first place and when.....
Speaking of NYC real estate fortunes, as I recall Leona Helmsley liquidated a lot of her portfolio before she died. Anyone have any idea what she did with the proceeds?
Macklowe ain't dumb. If Fortress missteps or tries to take control of the GM building this will quickly end up in court, and it'll get real complicated there.
question from someone not steeped in the intricacies of these types of actions...
Would this cause Macklowe to seek BK ?
What happens to the leases (in the GM building) should he seek BK ?
Firstly, I'm a bit of a noob lurker round these parts, so be kind. But something about the discussion of this post is quite different to many of the discussions regarding residential mortgages I've read. Namely, I don't find any talk of the morality what Macklowe has done. Is a commercial walking away different from a residential walking away? Why? Is commercial stupidity or greed or whatever more acceptable than j6p wanting something more and being guilty of the same? I may very well be missing something here and these may not be moral equivalents. Why?
It's not clear that he has walked. Given the amount involved it wouldn't be shocking. No one is too surprised at failures; they are surprised at the decision not to pay when you have the means to pay.
It may cause Macklowe to seek BK personally. The borrower on the Blackstone purchase portfolio was structured as a bankruptcy remote SPE (actually I think a few SPEs) so there would be a very high hurdle to clear to BK that borrower.
"Namely, I don't find any talk of the morality what Macklowe has done. Is a commercial walking away different from a residential walking away? Why?"
The Macklowe issue is a bit different from borrowers who have the capacity but unwillingness to pay. He is hitting the maturity on his bridge loan. This is requiring that he come up with something on the order of $7Bn to take out his current lenders. The properties are likely underwater and he almost certainly cannot get financing that is close to that amount. He also probably does not have assets liquid or otherwise to bridge the gap between what he owes currently and what he can borrow prospectively. That is a real live default there ladies and gents. He not only has negative equity but it's about to be realized via the maturity of his mortgage.
I'm not of the opinion that just because someone made a mistake in borrowing either commercial resi that the should be saddled with an unbearable debt. This is why you require people to put money down or collateral up. It makes the decision to walk away a little bit harder.
As someone who has sat on the sidelines waiting for the real estate market to get rational I'm a little peeved that the shame is going away but that's purely out of my own self interest, not some sense of moral outrage.
CRE = Containeth
Guess there really is plenty of headroom to negotiate short sales after all.
Hasn't this been expected for some time?
Better than getting stuck taking back tract houses in the Inland Empire, at least a NYC office building is worth something.
jingle mail writ large.
Again, in this commercial jingle mail situation, its the lender who is really on the hook.
If Mackelowe can do this, why can't all the hundreds of thousands of Californians who bought in 2004/2005/2006?
Somehow it makes me feel better that this crap was going on at the upper end, and is NOT just confined to regular people.
And the banks wonder why it's becoming socially acceptable for ordinary plebs to perform jingle-mail?
"If I owe the bank $1000, its my problem, when I owe the bank $7.6 billion, its their problem."
How did such a spectacularly bad deal ever get done in the first place?
FUnny thing is that he will go do the same thing again in 15 years and the banks will lend him the money. It is always the xeperience not track record.
FF:
Hubris.
From all those involved. Harry, Lenders, Appraisers, Leasing Agents, etc.
F. Frederson writes:
How did such a spectacularly bad deal ever get done in the first place?
Because commerical real estate always goes up! At least it did from 1998 to 2007, except for in 2001 and 2002! So there was no way to lose.
Looks like the wealthy are starting to feel the pinch.
Michael Jackon's Neverland Ranch is in foreclosure too.
At first, some thought Neverland was worth $12 million, but it is only worth about $6 million, according to the Santa Barbara County assessor.
Title documents (public information notice of default) claim that Michael Jackson is delinquent on a little more than $200,000 worth of mortgage payments. Its a $23 million loan. So foreclosure proceedings have begun. (Link)
_
Speed,
Now that is some first rate HELOC withdrawal!
I hope that the banks collect on the $1B personal guarantee.
I wonder if he signed up with "You Walk Away" first?
404 Not Found
Wait, I thought non-residential investment was going up, up, up?
It is always the xeperience not track record.
Word.
If you want millions from VCs, go crater a few companies with harebrained business plans and out of control spending.
I am not remotely kidding.
OT
CR,
Any insight into what this brings to the table?
Reuters Thursday January 31 2008
(Adds Florida subpoena, Countrywide comment, updated shares)
By Jonathan Stempel
NEW YORK, Jan 31 (Reuters) - Bank of America Corp said that Countrywide Financial Corp's second-highest ranking executive would run its mortgage business, and a large Countrywide investor said it opposes the bank's $4.4 billion purchase of the nation's largest mortgage lender.
Also Thursday, Florida Attorney General Bill McCollum said his office issued a subpoena on Jan. 17 to Countrywide for documents, as part of a broader probe into possible unfair and deceptive practices by lenders that offered subprime mortgages.
Bank of America said David Sambol, Countrywide's chief operating officer and top official other than Chief Executive Angelo Mozilo, would run its mortgage unit after the merger.
Sambol became Countrywide's COO in September 2006 after the sudden departure of his predecessor Stanford Kurland.
Though Countrywide lost more than $1.6 billion in the second half of 2007, Bank of America Chief Executive Kenneth Lewis said on Jan, 11 he wanted to retain some senior executives, whom he called "very, very good operators."
We're all AAA, now... and "very, very good operators."
YOY!?!
Neverland is not in foreclosure - Ron Burkle stepped in and "asked" the lender to give the Gloved One some more time - best bet is another 30 days - begs the question as to why Burkle doesn't just lend him the money....
I suspect someone at Deutsche Bank is going to have some explaining to do the the board. I can see it now - "This is investment banking, NOT subprime. We don't do NegAm without some collateral."
CR, I can't imagine that this deal has anything in it like a non-recourse clause (if so, that person or persons at Deutsche Bank is really going to get spanked). Any rumors of Macklowe being held liable for the difference or looking to declare bankruptcy? I seem to fuzzily recall many such suits having happened in the S&L days.
Neverland foreclosure & Burkle link
Macklowe had to have some serious stones to try to get such a deal. And his bankers had to have stones in their heads to agree to it.
And verily i say unto you that it came to past yesterday that a commenter on CR said they would not be cast down but they would be watched negatively.
And those amongst who have seen this great truth now tremble with awe and fear his presence
For we are surely not worthy.
or
WTF!! There are some pretty sharp dudes on this board!
Impressive!
Is it still considered jingle mail when you turn in the keys to 7 office buildings - I mean the shipping alone on that many keys must be $$...
I doubt Macklowe ever expected to pay back the loan. My guess is he just wanted to tell people at cocktail parties he got a $7.6B loan for a $6.8B purchase with only $50M down. Nobody in their right mind would ever believe him, though. By the way, my guess is also that the $50M downpayment was some of his "friends" money. Not his. Glad I'm not his friend, because, god knows, I'm a sucker for giving money to a guy who names his kid "Billy."
Hubris.
I know, I know, ego and perverse incentives rule the world of high finance. Still, this one was at a BritBrit level of crazy. 100%+ LTV and (AND!) neg-am on $7,200,000,000? Hello?
Macklowe let his near free option expire. $50m down? He'll get that much back in tax offsets alone. I've watched this deal and it never made any sense from any perspective including fantasies of breaking rent control and problem free NYC redevelopment.
Clearly the plan a year ago was to serial refinance while plumping and disposing of various properties to service the remainders then August happened.
How do guys like Macklowe become rich?
unrelated:
Tanta/CR:
Do you know if any of the huge charges we've seen relate to reversals from Gain on Sale transactions? It hasn't been highlighted if they were. Shouldn't there be a ton of these?
REBear, I don't know maybe by taking too much risk?
So what I want to know is where's HIS rogue trader hiding?
Wonder if he was forced into "non profit" counseling first...
I kid.
He wanted to show his wife his rogue trader but she said she was too tired and had a headache.
So what I want to know is where's HIS rogue trader hiding?
It's that damn Billy.
REBear - here's how. Start in a position of privilege. Bet the farm during bull markets. Make a killing. Keep betting the farm. When times get tough (the times that require thinking, as opposed to bullheadedness) lose so much money that people think you are such a player that they'll cut you some breaks, and then let you right back in the game later when the next bull run comes around. It's an insiders game, and the only trick is finding the ticket to enter the fixed game.
And in case that isn't clear, see example D.Trump.
Do you know if any of the huge charges we've seen relate to reversals from Gain on Sale transactions? It hasn't been highlighted if they were. Shouldn't there be a ton of these?
No . . . why should there be a ton of those?
Donald Trump is a personal hero of mine. I certainly hope you are not implying that he is a numbskull. Because, that is a false claim. You shall be stricken from this earth for such heresy.
Are we going to start calling it Douche Bank soon?
Donald Trump - Wikipedia, the free encyclopedia
Before you get too down on Deutsche Bank and Fortress (the mezz lender), don't forget this loan was cross-collateralized against the rest of Macklowe's New York portfolio. He has some very choice assets (that still have equity) including the GM building. I have heard that GM building is being marketed and that bids are coming in very high ($4-5b). I can't argue that the banks won't lose money on this deal, but there is a lot more going on than what gets reported in the MSM.
You mean this was a non-recourse loan?
"How do guys like Macklowe become rich?"
By risking other people's money (e.g. Banks), this example shows it clearly.
How to make a small fortune in Manhattan RE? Start with a very big fortune in Manhattan RE.
"How do guys like Macklowe become rich?"
By risking a lot of other people's money and all of his personal net worth at the right time.
"How do guys like Macklowe become less-rich?"
By risking a lot of other people's money and all of his personal net worth at the wrong time.
"How do guys like Macklowe become less-rich?"
Following Jim Cramer's advice.
Wonder if they mailed in the keys.
I hear they have their eye on an equally nice building across the street that's listed at half the price.
Ethel! Back up the truck!
Geoff,
Old money. Looks like William Macklowe now controls the family business.
Rough edges make rough sailing | Real Estate Weekly | Find Articles at BNET
"I've sailed through hurricanes before," says [Bill] Macklowe
Macklowe's FICO score just dropped a notch
This was not a "negative amortization" loan in the strictest sense (i.e. unpaid debt service gets added back to principal). It did not have an accrual feature.
The term "negative debt service", as used by the writer, just refers to the fact that cash flow was not sufficient to cover debt service. Dumb terminology but whatever.
The loan had a debt service reserve in place to cover the shortfall.
Glad to see everyone is abandoning bad investments, and negative equity. But hey, maybe Macklowe just did it to spend more time with his family. I wonder if this will effect his fico score.
Isn't there a tipping point (in the Malcom Gladwell sense) aspect to jingle mail?
I can just see there being some point where enough people have performed jingle mail that there's no disincentive to perform it yourself because you'll look just like everyone else in 5-10 years when you try to borrow again (i.e. you have a default from "that crazy 2007-2008" time period.
Have we hit that collective action / tipping point yet?
Spending time with your family only affects your FICO score if spending time with your family involves buying $6.8B worth of property with a $7.6B loan with $50M down. Otherwise, you should be safe.
What's going on now with MBIA and Ambac is one of the all-time financial soap operas.
These companies have almost no chance to survive as going concerns. But apparently, it serves some interest for them to talk tough and buy time. The ratings agencies are being pressured by somebody to hold off YET ANOTHER DAY. Maybe MBIA and Ambac are being pressured by somebody, too. With free will, I wouldn't have delivered the same call the MBIA CEO did today. It was dishonest and may come back to haunt him. It didn't help him or MBIA much. But it helps SOMEBODY.
Strings are being pulled behind the scene. It's almost like...how many people can Moses get out before the Red Sea crashes down?
Today's events were all bearish, in my book. Time is running out.
jg writes:
I hope that the banks collect on the $1B personal guarantee.
jg
Yes, indeed. Couldn't happen to a nicer guy (but I didn't see the reference to the personal guarantee, was it behind the WSJ wall?).
How do you become a millionaire on NY real estate? Start off as a billionaire and borrow money from hedge funds.
"Macklowe pledged a personal guaranty of $1billion"
Yikes!
I'm guessing Sam Zell has a smirk on his face about now?
"With free will, I wouldn't have delivered the same call the MBIA CEO did today."
Wow, if he's fudging, the plaintiff's bar will have him skinned alive. (Or maybe not, who knows?).
Didn't Macklowe do stuff like demolish buildings with tenants still in them a while ago. I might be wrong about the specific, but there was some pretty egregious behavior on his part.
David in NY,
Knocked down a building in Times Square in the middle of the night without a permit.
No tenants (as far as we know) were harmed.
google him. then hit the news tab. the full wsj story is there.
SUSPICIOUS FIRE BADLY DAMAGES WEST SIDE HOTEL - Free Preview - The New York Times
The above gives a taste of Mr. Macklowe.
As does this:
MACKLOWE DEMOLITION MAN IS GIVEN A NO-JAIL SENTENCE - Free Preview - The New York Times
Rich:
I agree w/your assessment about Moses and the Red Sea.
For all of the crap about Bernanke, he wasn't at the rudder for years and he is, in a sense, a bagman. Was reading a history of the Korean War and an author noted that some of the most difficult leadership involves getting as many out of danger while holding a rear-guard action. All of this does smack of rear-guard...
So lower as far as possible and let as many as possible refi (or whatever) in order to hang on.
OOH. Speaking of which...
Rich,
I doubt that MBI/ABK get downgraded.
Systemic shocks won't be allowed to occur.
Frankly, they'll probably go BK before they get downgraded.
Cramer says the the market is irrational b/c stocks were down this morning. I'm beginning to wonder whether rationality matters.
Consumer spending will increase someday right? Might as well buy stock now in anticipation of that.
Homebuilders (some of them) will start making money again someday? Another reason to start buying in anticipation.
Thanks Dunham, I looked him up, links above. After the illegal demolition, there was a fire (two fires in the building broke out simultaneously) in an adjacent building Macklowe owned, and two squatters barely escaped.
People don't offer $1b in personal guarantees if they actually have $1b in attachable assets. Macklowe is swimming naked and about to be ummm... exposed.
there was a fire - was it insured?
Rich,
Everything that happens in the financial markets is perfectly legitimate. There are no manipulating forces as that would be illegal and/or unMerican.
George W. Bush
That's not jingle mail...that's chain mail.
Cheers,
How do you start a flood?
What happens if MBIA is downgraded by S&P and not Moody's? Are they still AAA?
Not sure I understand the effects of "this deal"...
Did they leave his name on the buildings for the sole purpose of avoiding the transfer taxes? What reason is there to keep him involved at all? Hasn't he already proved himself unworthy?
How can the lender ever become whole again, given that we can expect rents to go down (and vacancies up) in this recession that just started?
Rob Dawg:
Start by building a city where there is no logical reason to build one,,,
ShortCourage,
There are going to be a lot of 2% and skim lenders out there. Won't be enough cream around to for many to be whole.
The National Dairy Council on Lending
ShortCourage,
If the lender/lending group forecloses on Macklowe that potentially sets off a 3.0% transfer tax. On $7.6 billion, that is a big number.
By keeping title in his name, they avoid that, and will just have to deal w/ it when they sell, rather than twice.
Regarding his management, Macklowe is regarded as one of the better commercial landlords in New York City, and knows the buildings.
His play was to roll this loan while leases expired over time. Couldn't get the refi done and here we are. Has nothing to do with mismanagement in this case - there isn't that much vacant space, it is purely a value play (under market rents in the building, increasing rents in NYC, etc.).
I'm guessing Sam Zell has a smirk on his face about now?
Drew
Ol' Sam didn't make all that money by being stupid.
Dunham,
The problem I have is calling anything a "value" play when rents have spiked, a recession looms, and people are betting that rents (or real estate) "always go up." I call it a "risky" play with very bad odds. Funny how it didn't work out well.
There will come a time when America will need quantities of new homes built. But it's years away, and only 2-3 of the large public builders will last until then. They will be much, much smaller.
Any company could become a homebuilder. Warren Buffett could start homebuilders from scratch. You only need two things: land and credit. But none of the large public builders will have them. So, the next wave of building will be led by smaller, nimbler, newer companies.
Not one of the large public builders planned smart or guessed right for this cycle, which won't forgive them.
February 1, 2008
LONDON -- Standard Chartered PLC said it will take a $7.15 billion structured investment vehicle it manages onto its balance sheet, in a move it says shouldn't materially affect its 2008 earnings or liquidity position.
The U.K.-based bank, which makes most of its profit in Asia, said it will provide a backstop liquidity line on Whistlejacket Capital Ltd.'s $7.15 billion in outstanding senior debt. By selling off assets, Standard Chartered has reduced the size of the vehicle, which was $18.2 billion as of Aug. 31
Rich,
Actually the problem with the homebuilders is they have too much land and they are running out of credit. But, otherwise you are right, they are screwed.
Rich,
I agree, I was being sarcastic. Tough day in my account today, so a little bitter. Already dreading the inevitable 4.7% unemployment reading with 100k+ payroll. Can't believe the run-up in HBs.
Think I need to go get a drink.
OT
"Last years model: stricken US homeowners confound predictions"
FT.com / Comment / Analysis - Last year’s model: stricken US homeowners confound predictions
Nice summary of how walk-away homeowners somehow didn't make it into the model.
This may be for the drinking inclined or get you that way - I think this is an update from the last go round - Fed non-borrowed reserves declined (increased?) anyways went more negative by ~74%...not my area but some folks care to comment?
Non-borrowed reserves almost doubled to -2424?
Rich,
Actually the problem with the homebuilders is they have too much land and they are running out of credit. But, otherwise you are right, they are screwed.
Elvis,
They will be forced to use land to pay back credit, in the same way jewelers will have to melt bracelets into gold to pay back credit.
In the end, they will have very little land or credit left.
Yes, rich. I misread yours the first time. I agree with you.
Look at financials AH. On a run. This action reminds me of the '07 Apr- early June time frame last year. I got clobbered and driven out of my short positions over time, hanging on to my LT options. I eventually recovered and then started to smile but I got discouraged because there was absolutely no reason for the pounding. Every bit of economic market information contradicted the rally. I can't go through another 2 month long drubbing.
At least I'm 40% hedged, and the hedges are beginning to work.
I am not sure how many readers here have seen this article from yesterday, but my mind is still trying to wrap around the application of the work "Simulacra and Simulation" to the current financial markets. Cuts to the heart of the monoline insurance scam.
Five Things You Need to Know: The Crisis of the Real-Minyanville
"The illusion has become real"- The Matrix
Conjure Bag just sunk his bear fangs into Mr. Macklowe's gonads.
so he put down 0.6% of the purchase price to own these properties. that's not "equity" that's option money. option has now expired, so walk away.... can't believe banks were funding these types of deals. dopes.
As I read somewhere else today: A bear market must keep moving or it dies.
That has to include lots of up days to eventually sell into. If I'm sitting at Goldman's prop desk tomorrow I want to see how high we can run things with light commitment, e.g after the jobs number...before slamming the whole show when nobody expects it. Why sell at a low price when you have fools like Cramer ensuring you can sell at a high price?
One of my own favourite quotes, from Benjamin Franklin:
"He that can have patience, can have what he will."
"CR, I can't imagine that this deal has anything in it like a non-recourse clause (if so, that person or persons at Deutsche Bank is really going to get spanked). Any rumors of Macklowe being held liable for the difference or looking to declare bankruptcy? I seem to fuzzily recall many such suits having happened in the S&L days.
--Andrew | 01.31.08 - 5:09 pm | # "
The Deutsche Loan is non-recourse. His problem is the Mezz from Fortress. That is where the guarantee and the pledge of his other collateral is. Fortress can step into his shoes on the Mezz but they would have to cure the senior loan. They may decide that they have enough collateral in the other properties and their interest in the Mezz is evaporated and just jet. It's not likely that they will but it's a possibility.
"Mr. Macklowe pledged a personal guaranty of $1billion for that loan as well of his interests in 12 other properties,"
Now that's recourse...
Clarification - The personal guarantee is for the Fortress loan.
"Mr. Macklowe pledged a personal guaranty of $1billion for that loan as well of his interests in 12 other properties,"
Now that's recourse...
Allen C | 01.31.08 - 7:43 pm | #
Exactly. The Deutsche Loan was a 5.8Bn Senior on roughly 7.1Bn transaction so it's in the 80% LTV range. The loan may be closer to 90% or 100% LTV now but hey, that's the market. The Fortress Loan was secured by a pledge of the equity in this portfolio and an additional 12 or so properties. The interest in the GM building alone could make them whole. How anyone says this is a completely stupid loan that is 100% financing is beyond me. Pledging the equity in assets counts as additional collateral...for realsies.
Look at this 1yr DOW Chart:
$INDU - SharpCharts Workbench : StockCharts.com
Now follow the MACD line at the bottom over the year. Each cross has been a reliable indicator of the move in the DOW. This bull may still have some time to run....
Note that Fortress does not own 100% of mezzanine debt nor does DB own the entire First Mortgage.
This loan was very much chopped up and spread around Wall Street.
dunham writes:
Note that Fortress does not own 100% of mezzanine debt nor does DB own the entire First Mortgage.
This loan was very much chopped up and spread around Wall Street.
dunham | 01.31.08 - 7:52 pm | #
Good point. I was making the distinction between the two major groups of creditors just to clarify what the business arrangement generally is.
To get back OT, CR, I think Macklowe was just a rogue real estate titan
RRP--
Following up on your comment, my question is, what does Fortress do now? Can they force asset sales from his existing portfolio or do they have to wait until DB liquidates the EOP assets?
OT
Bert the turtle provides good advice: Internet Archive: Free Download: Duck and Cover
o doubt RPP, great point.
but can they collect is the question?
how much would is really cost in legal fees as a % to string it out forever
Tanta:
"Do you know if any of the huge charges we've seen relate to reversals from Gain on Sale transactions? It hasn't been highlighted if they were. Shouldn't there be a ton of these?
No . . . why should there be a ton of those?"
How could their repurchase liabilities not be greater than what they reserved?
This should be great news for the market tomorrow. More stuff to sell or resell. Perhaps a few lawsuits. All adding to the GDP going into the 3rd qrt. Hooraah.
JJL: Simulacra and Simulacrum. Interesting, but a lot of hooey. The constant attempts to make something culturally new out of "jingle mail" miss the economic reality of the borrowers. The size of the house debt in relation to other household income and indebtedness is higher than ever experienced in the past, and in declining markets (not rising as in the rating agencies' subprime models). Americans are rational. Faced with negative interest rates, they will make leveraged investments in (currently) appreciating assets. Faced with unmanageable debt secured by depreciating assets, they will disinvest (jingle).
A trip by Macklowe to the Middle East to drum up equity partners proved fruitless, the people said.
lol
When I tried to borrow 6.8 billion in college loans, those bastards said no!
Zac | 01.31.08 - 5:40 pm |
Ahh, just like Trump.
As A. J. Liebling once said of Hearst (speaking of his Atlanta losses), "The prerequisite for losing $21,000,000 is not genius; it is to have $21,000,000".
Nowadays we can all lose much more than we have.
Well they can't do it yet as he hasn't defaulted. I am not 100% sure how the collateral pledges inre: Fortress are structured but I am willing to make an educated guess that they could take the extra security (equity in the 12 other properties) and try to sell it to satisfy the debt. Given the market, I'm not sure that this is the best approach but I don't have the specifics of what the security is for the loan who knows, there could still be a lot of equity in there.
One thing that no one should discount is the refusal of Macklowe to go easy. I have seen stuff like this drag on for quite some time on lesser grounds but trying to predict what happens if and once you get to court is a bad business to be in.
Macklowe ain't dumb. If Fortress missteps or tries to take control of the GM building this will quickly end up in court, and it'll get real complicated there.
A lot of high stakes poker going on behind the scenes, and hard to say how it all plays out, but it won't be fast.
GM Building should be good for $3.5 billion easy (no more than $2.5 billion of debt on it - i think less), possibly as much as $4.0 billion.
The real question is who is going to pay $7.6 billion for these assets? Even $6.6 billion is probably a stretch considering what he paid for the portfolio in the first place and when.....
Speaking of NYC real estate fortunes, as I recall Leona Helmsley liquidated a lot of her portfolio before she died. Anyone have any idea what she did with the proceeds?
Sam is my idiol.
Macklowe ain't dumb. If Fortress missteps or tries to take control of the GM building this will quickly end up in court, and it'll get real complicated there.
question from someone not steeped in the intricacies of these types of actions...
Would this cause Macklowe to seek BK ?
What happens to the leases (in the GM building) should he seek BK ?
You know, if they had just given him $8 billion they might still have a performing loan.
Firstly, I'm a bit of a noob lurker round these parts, so be kind. But something about the discussion of this post is quite different to many of the discussions regarding residential mortgages I've read. Namely, I don't find any talk of the morality what Macklowe has done. Is a commercial walking away different from a residential walking away? Why? Is commercial stupidity or greed or whatever more acceptable than j6p wanting something more and being guilty of the same? I may very well be missing something here and these may not be moral equivalents. Why?
It's not clear that he has walked. Given the amount involved it wouldn't be shocking. No one is too surprised at failures; they are surprised at the decision not to pay when you have the means to pay.
"Would this cause Macklowe to seek BK ?"
It may cause Macklowe to seek BK personally. The borrower on the Blackstone purchase portfolio was structured as a bankruptcy remote SPE (actually I think a few SPEs) so there would be a very high hurdle to clear to BK that borrower.
"Namely, I don't find any talk of the morality what Macklowe has done. Is a commercial walking away different from a residential walking away? Why?"
The Macklowe issue is a bit different from borrowers who have the capacity but unwillingness to pay. He is hitting the maturity on his bridge loan. This is requiring that he come up with something on the order of $7Bn to take out his current lenders. The properties are likely underwater and he almost certainly cannot get financing that is close to that amount. He also probably does not have assets liquid or otherwise to bridge the gap between what he owes currently and what he can borrow prospectively. That is a real live default there ladies and gents. He not only has negative equity but it's about to be realized via the maturity of his mortgage.
I'm not of the opinion that just because someone made a mistake in borrowing either commercial resi that the should be saddled with an unbearable debt. This is why you require people to put money down or collateral up. It makes the decision to walk away a little bit harder.
As someone who has sat on the sidelines waiting for the real estate market to get rational I'm a little peeved that the shame is going away but that's purely out of my own self interest, not some sense of moral outrage.
Got it, thanks. I took the phrase "walking away" a bit too literally.
This loan was very much chopped up and spread around Wall Street.
rc helicopter
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