How Lehman Brothers Got Its Real Estate Fix

New York Times:

Many others were equally in awe of Mr. Walsh's intellect. Until Lehman Brothers collapsed last September, Mr. Walsh was considered the most brilliant real estate financier on Wall Street. In the '90s, he pioneered the art of lending to office building developers and then slicing up and repackaging the debt for investors. Less risky pieces went to institutional investors; the lower-rated chunks to hedge funds and others hungry for juicier returns. Lehman pocketed a fee every step of the way, and it often retained a risky piece or two to give its own earnings a kick.

Read the whole story: New York Times

Comments

[Kristina500]

"Guys like this are very rare," says Mr. Rosen, the developer. "He"ll be back. He picked up the phone and people listen. Nobody can take that away from him."

That's the problem - he is still made up a hero, even though his only heroism is greed and disregard for responsibility and reason.

I sold my house in spring of 2006 and rented because the market had clear signs of overheating. Since then the house lost about 40% of it's value.

I think I have more brains that this guy. If I was running Lehman, it would still be around.

[Lawrence McDonald]

Mark Walsh took $30 + billion of risk with who's approval? Find out July 21st in the New Lehman Book: A Colossal Failure Of Common Sense, The Inside Story of the Collapse of Lehman published by Random House.

Lawrence G. McDonald Author

http://lawrencegmcdonald.wordpress.com/

[alexandra hamilton]

How could a real estate wizard who built a thriving business by creating new ways of managing risk by sweeping loans off Lehman’s balance sheet end up doing deals that contradicted everything he seemed to stand for — and contribute to the collapse of one of Wall Street’s most venerable firms?
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This one is a gem. Apparantly, sweeping loans of the balance sheet is now called 'create new ways of managing risks' when it was formerly just called cooking the books by hiding relevant and material information.

[sonofsamphm1c]

The terminology is really bad. He started out making deals. Lehman would "sweep the loans off the balance sheet" by selling them to other investors. In that case, the loans - risks - truly were swept off the balance sheet.

Nothing was hidden. No relevant material was out of view.

Eventually they were not able to sell the loans; meaning, they were no longer able to sweep the loans - the risk - off the balance sheet. When that happened the loans stayed on the balance sheet, unhidden, in full view, all relevant material right there in front of everybody - and soon thereafter, Lehman Brothers was in deep trouble, and everybody knew it.

[Bruupo]

Your terminology isn't much better, frankly.

Repackaging the debt as investment instruments in the way that they did was dishonest from the beginning. They certainly didn't just re-sell loans, and lots of "relevant material" was kept from view in how they did it.

In creating those instruments they used mathematics that no one can defend at this point, and no one could sufficiently "disprove" at the time (but its not like anyone had a chance to disprove their soundness, since the SEC was all into their Buddhist, "voluntary regulation" phase and the ratings companies were apparently as corrupt as could be).

By pooling the loans together before cutting them into derivatives, the same mechanism which gave the higher risk pieces higher yields lent the lower yield pieces much greater risk than advertised. And keeping pieces while they did this is really no different that trading on the margins, in the end.

[Bruupo]

The reason they could no longer "sell the loans", as you put it, is because these instruments were dependent on home mortgages, and even if an upright citizen or business takes out a reasonable mortgage and pays it religiously, the value of their real estate is still determined by whether their neighbors pay theirs. And when basically more of the equity in said real estate is leveraged than not, and almost half of them are written with some form of predatory/­rose-color­ed-glasses­-to-the-fu­ture terms in them, an overdue market correction based on available inventory vs stagnant wages and huge speculatory spikes in energy prices- means house of cards comes down.

It wasn't sustainable when it started, and they had plenty of historical evidence that should have told them that.

[Lawrence McDonald]

Mark Walsh took $30 + billion of risk with who's approval? Find out July 21st in the New Lehman Book: A Colossal Failure Of Common Sense, The Inside Story of the Collapse of Lehman published by Random House.

Lawrence G. McDonald Author

http://lawrencegmcdonald.wordpress.com/

[vesaversa1]

It's about time they are currupt .

[2Bfair]

My hunch is that Lehman Bros alone was allowed to fail by Hank Paulson because it was a Goldman Sachs rivile, and Goldman Sachs picked up any and all of its profitable pieces. Does anyone know, where did Lehman's wealthiest clients and their brokers go?

[nomadicexpat]

goldman did not pick up the pieces, barclays did .. and strategically barclays is stronger than lehman ever was or could have been .. so it's not like this helped GS in any meaningful way

[sonofsamphm1c]

Yes, the persistent garbage about GS being the Darth Vader of Wall Street is misguided and stupid.

They allowed Lehman to fall because they miscalculated what allowing a large financial institution with significant global externalities to fail would mean in terms of damage to the global economy.

It blew up in their faces.

They are essentially doing the same thing now, only in a very deliberative and orderly fashion, and the shocks to the global economy are almost unnoticeable.

[Mondayboy]

mark walsh is poorly educated..­..and these people think he is a god? he shouldn't be allowed close to anything with value - he will destroy it.

[breakingpoint]

I don't see why the People just don't take it all away from them.

I know it's a bit of a novel idea for the US, perhaps revolutionary, but no amount of talking seems to make sense to these guys and apparently they have no moral compass. The justice department isn't doing anything, they seem a bit understaffed, so I'll throw it out there....

Think the American People have had enough yet?
If not what and when is enough?

[HamletsMill]

Thank God(ess) I met Kurt Vonnegut face to face in NYC back in 1983. A marvelous man. I will say it for him here from somewhere in the Universe.

"So it goes."

[HarlemFreeThought]

But I digress:
I ran into Mr. Vonnegut on 3rd Ave., about a year before his passing! He was frail at that time but he walked down 3rd slowly without anyone realizing who he was. I didn't bother him , i just watched, along with a doorman who also recognized the author .

[elsellel]

folks, folks, folks... when we all just clue into the fact that the whole world is a scam.

[Carolab]

"What’s more, Tishman Speyer’s chairman, Jerry Speyer, had a close relationship with Mr. Fuld. They were both board members of the Federal Reserve Bank of New York." (BINGO.)

But several people involved in the deal say the parties thought that the subprime mortgage crisis would actually help Archstone because people who could no longer afford houses would rent the company’s apartments (NICE. TAKING ADVANTAGE.­)

Mr. Walsh tried to limit Lehman’s risk. He sold $8.9 billion of the Archstone debt to Fannie Mae and Freddie Mac and persuaded Bank of America and Barclays to buy $2.4 billion of the bridge equity (OF COURSE, THE GSE'S AND THE FED BANKS WORKING TOGETHER HERE.)

In March 2008, Bear Stearns nearly collapsed and was sold to JPMorgan Chase in a government­-supported deal. Wall Street wondered which bank might be next to fall. Short-sellers thought they knew: Lehman Brothers (ONE OF THEM WAS JOHN PAULSON.)

Lehman ended up with $29 billion in commercial mortgage exposure on its books in the second quarter of 2008 — 30 percent more than Deutsche Bank and Morgan Stanley and 70 percent more than Goldman Sachs (JOHN PAULSON WAS AN AWFULLY GOOD GUESSER.)

“Guys like this are very rare,” says Mr. Rosen, the developer. “He’ll be back. He picked up the phone and people listen. Nobody can take that away from him.” (WE KNOW. THAT'S THE PROBLEM.)

http://www.nytimes.com/2009/05/03/business/03real.html?hp

[Carolab]

Speaking of Lehman, I went looking for John Paulson's house (he's the "legendary hedge fund trader who made billions on his "prescient short-sale trades, such as Lehman) which is on the market in Southhampton (can't sell it after a year for $13.9 M; paid $12.5 in 2006 and originally asked $19.5, whatever).­...

Then came across another more famous resident of the area, Calvin Klein. When so many of us have so little, Mr. Klein decided he needed to tear down this 50,000 historic landmark (built in the '20s by the Duponts) and build a new, "green" beachhouse.

Can't he find some better way to spend his money than tearing down a home that is part of the heritage of this area?

http://www.hamptons.com/detail.php?articleID=6207

[PhilipTaylor]

Ah the good OLD Days of 2007 and 1920!

Got to have the Biggest and Gaudiest Mansion to WIN! Culture of Wall Street/Corporate America in the Bush ERA!

[sonofsamphm1c]

Have you ever seen Warren Buffett's mansion?

[nomadicexpat]

that monstrosity is not part of the heritage of this area. the original house was built by the duponts, but the klein house as it is now was put in place in the 1990s and is a blight on the beach

[Carolab]

The structure is original; it was remodeled.

[Carolab]

From the article I posted:

Klein purchased the 50,000 square foot mansion and the surrounding 11 acres of land on both sides of Meadow Lane, providing both ocean and bayside waterfront in 2003 for $28.9 million. The house had been on the market at a listing price of $45 million for three years when former owner Francesco Galesi put the property on the market in 2000. Galesi purchased the property from its previous owner, Barry Trupin, for $2.3 million in 1993. The DuPont family, the property's earlier owners sold the estate to Trupin in 1979 for $330,000.

The plans call for an up to the minute new home that will utilize green concepts in its building and design.

Trupin, the most flamboyant in this impressive series of owners, gave the house its present character and its most lasting moniker - “Dragon Head." The castle like exterior and the imposing turret were all created by Trupin, along with an indoor shark tank. Galesi dubbed the imposing residence “Elysium" and while the DuPont family inhabited the oceanfront abode it went by the name of “Chesterto­n."

While the structure's architectural history may not be of note, the familiar and imposing home is something of a local landmark and is certainly rich in history.