From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘Lehman Brothers

Hard to feel sorry for Bank of America…

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….but let’s try, just this once. As pretty much everyone knows, over the past few years, they’ve repeatedly shot themselves in the foot, then reloaded, then opened fire again. Public displays of embarassment like the $5 debit card fee are just the tip of the iceberg (and, indeed, helped them shed a lot of low-return or even negative-return depositors who could and should be better handled by credit unions).

More interesting has been their acquisition of Countrywide a few years ago, which everyone agrees was a debacle, and their subsequent messy handling of CW’s meltdown. However, now that they’re in such a fiscal and regulatory mess, BofA is having to shed itself of assets — at firesale prices — that in good years they’d want to keep. The latest example is BofA’s interest in Archstone Residential, one of the biggest apartment owners in the U.S. with 78,000 units. Recall that apartments are doing VERY well today, and are the one sector of the real estate industry which weathered the recession storm nicely. Indeed, given the trend in apartment valuation, BofA would be well advised to hang onto this asset for dear life.

BofA and Barclays acquired a 53% interest in Archstone Residential via a Lehman Brothers-led acquisition. The original purchase price in 2007 was $22 Billion. That works out to about $282,000 per apartment, which is pretty darned high, admittedly. Let’s suggest that a reasonable value would be in the range of $200,000 per apartment, or about $15 Billion. Of course, REITs often sell for a premium over net asset value, so the $22 Billion acquisition price probably wasn’t terribly off the mark at the time. Thus, the total net asset value $15 to $16 Billion, which indeed is close to Dow Jones’ current estimate of $18 Billion.

However, who has $15 to $16 Billion laying around? (Or, to be specific, 53% of $15 to $16 Billion, or about $8 Billion?) Up to the plate steps Sam Zell — yes the same guy who gave us Equity Office Properties. He now owns Equity Residential, which is making a bid for the 53% at….. (drum roll, please)….. $2.5 Billion in cash and stock. In general, this works out to about $64,000 per apartment, which is painfully low. Note also, that Zell is the winning bidder, having out-bid AvalonBay, Blackstone, and Brookfield.

Why is BofA letting this go so cheap? For one thing, they don’t have much choice. The regulators are making them dump whatver they can at Craigslist prices to generate cash and cash-equivilents. For another, the nasty market we’re in makes cash king — no one is financing this sort of deal, not even at these firesale prices.

In some ways, Sam Zell is a lot like Warren Buffett. Often it’s said — mistakenly — that you could do worse than simply buying stock in whatever Buffett buys. That’s true, but only if you pay the prices (usually deeply discounted) that Buffett pays. Now, the same appears to be true with Zell.

Written by johnkilpatrick

November 18, 2011 at 10:36 am

Movie reviews now? Say it ain’t so!

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About half the movies I see are on a 5 X 8 screen on the back of the airplane seat in front of me. Fortunately, I fly Delta, generally coast-to-coast, and they usually have a pretty good selection, particularly up front where the drinks are comp’d. (Note — I said “comp’d”, not “free”. There’s a critical economic difference, but I digress….)

Anyway, last night, I flew in from Memphis and watched “Wall Street — Money Never Sleeps” with Michael Douglas and a first class supporting cast. The important thing to note is that it was “done” (written, directed, etc.) by Oliver Stone. This was very much an Oliver Stone movie, and that means it had a very obvious message and a very obvious point of view. Like many (most?) Stone movies, this one was set against the backdrop of very real events (the market melt-down, the Lehman Brothers collapse, the housing finance crisis) but then superimposed a very fine but fictional story which fit the events in question. Stone had the advantage that the events of the past few years were absolutely perfect for a Gordon Gekko reprise, played with his normal scenery-chewing skills by Michael D. Even Charlie Sheen made a one-minute cameo, reprising his character from the original W.S. just to bring closure to that story arc (and provide a very obvious product placement for a firm that, by weird coincidence, called me trying to solicit my business today.)

Yes, I liked the movie, from the perspective of a piece of fiction. However, even though the events of the past three years fit perfectly into Stone’s world-view, I none-the-less have to pick a bone or two with him over the tone of the movie. The characters, with the possible exception of the highly flawed “young male engenue” (played surprisingly well by Shia LaBeouf) are all portrayed as greedy, soul-less SOB’s for whom making obscene amounts of money is just a way of keeping score of how many of their friends/competitors they’re able to screw. Every single character in a suit is made out to be driven by sheer greed and lust for money, without a single redeeming quality. Even the one supposedly “good” character — Winnie Gekko, Gordon’s estranged daughter, played without a single smile in the whole movie by Carey Mulligan — is so deeply flawed by her relationships with her Dad and her dead brother that she lets Gordon rot in prison rather than visit him. (Ironically, the plot begins with her in love with LeBeouf, who at the start of the movie is essentially a 30 year old version of her father. As he goes through his painful and inevitable redemption process, she rejects him at the very points in his life when he probably needs her the most… but I’m digressing again, aren’t I?)

I’ve had the pleasure of working in finance for a long time — over 3 decades — and a fair chunk of that was spent on Wall Street (Dean Witter). The vast majority of the folks I knew, from the bottom to the top, were honest, family oriented, hard working, pillars of their communities. They really saw themselves performing the twin public services of financial intermediation, which is providing quality investments on one hand, and providing capital and liquidity for business on the other. Unfortunately, some terribly bad mistakes were made during the run-up to this crisis, mainly in terms of the financial products which did not properly account for or manage the risk of an increase in the foreclosure rate. As it turns out, a very small increase in household foreclosures, precipitated by a lot of things (not the least of which were borrowers who shouldn’t have borrowed) set off a cascade that got us where we are today.

Over the past couple of years, I’ve been in PLENTY of forums, panels, and meetings with financial “types” from every facet of the money industry, who are focused on one and ONLY one thing — trying to get the system fixed. Do these folks get paid well? Yes, they do. A small handful of them are paid obscene amounts of money, in the same way that a small handful of baseball players get paid obnoxiously well, too. At the top of any game, there are a handful of extraordinarily talented folks who work very hard and get paid obscenely. But, 99% or more of the folks in the finance industry are paid “well” (not “Gulfstream G-IV” money, but “I get to ride in first class most of the time” money). They work hard. They want to see the system work, and they know just how important it is to the whole world for this system to get fixed.

So there it is. Watch “Wall Street” as a very well done piece of fiction, but please recognize that Stone’s characterization of the Finance community is highly skewed and w-a-a-a-a-a-y off base.

Written by johnkilpatrick

February 4, 2011 at 5:24 pm

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