Stuy Town Teeters; SL Green, Tishman Speyer And Others To Get Poleaxed

Big, looming CRE default. Acquired for $5.4 billion, estimated to be worth $2.1 billion. Oops.

The WSJ does a great job reporting. Here are our favorite parts of the article [emphasis added]:

One of the biggest, most high-profile deals of the commercial real-estate boom is in danger of imminent default, say people familiar with the matter, signaling the beginning of what is expected to be a wave of commercial-property failures.

The sprawling Manhattan apartment complex known as Peter Cooper Village and Stuyvesant Town -- acquired for $5.4 billion in 2006 by a venture of Tishman Speyer Properties and a unit of BlackRock Inc. -- is running out of cash. As of the end of September, it had $33.7 million left of the $400 million in interest reserves set up to service its debt, according to the people familiar with the matter. At its current burn rate of about $16 million per month, the reserve could be depleted before the end of the year, the people said. Others have said the venture could avoid default until February.

The spokesman for Tishman Speyer declined to comment on behalf of the partnership.

The ownership, which includes a roster of high-profile investors from the Church of England to the California Public Employees' Retirement System, has no current plans to inject more capital into the venture, according to the people. Lenders who financed the deal first projected the complex's net operating income would triple to $336 million in 2011 from $112 million in 2006, according to Deutsche Bank AG. But net income is projected to be $139 million this year, according to Realpoint LLC, a credit-rating agency.

Investors who bought into the deal were confident that real-estate manager Tishman Speyer would be able to greatly boost profits by raising rents in Manhattan's sizzling apartment market. But today, the 56-building, 11,000-apartment property is suffering from a slowing New York economy, a lawsuit that has hindered the owner's ability to convert rent-controlled units to market rentals, and the debt load.

Realpoint estimates that the property is worth only $2.1 billion now, less than half of the purchase price. By that measure, all the equity investors and many of the lenders, including Government of Singapore Investment Corp., or GIC; Gramercy Capital Corp.; and SL Green Realty Corp., are in danger of seeing most, if not all, of their investments wiped out. Hartford Financial Services Group, which bought $100 million of the debt tied to the property, said it has "sufficiently reserved for ths asset in the first half of this year."

...

These projections convinced Calpers and the pension funds of several other states to make large equity investments in the deal. Meantime, the Tishman/BlackRock venture put a $3 billion first mortgage on the property and another $1.4 billion of so-called mezzanine debt[TILB - donut].

...

But even a victory by the Tishman/BlackRock partnership likely won't save the deal from a default. One indication: a "special servicer" is in the process of taking over the deal's CMBS debt, say people familiar with the matter. Special servicers are experts in dealing with troubled loans. The transfer to the special servicer, CW Capital, could occur as soon as this month, the people said.

Major players in these talks will likely be Fannie Mae and Freddie Mac, which together own more than $1.5 billion of the most highly rated, triple-A slices of the CMBS debt, according to people familiar with the matter. They would likely benefit from a fast foreclosure because, as senior lenders, they would be paid back first. [TILB - Let's hope it's worth $2.1 billion and not less as the AAA is probably already modestly impaired at that valuation...]

Fannie And Freddie Will Allow 125% LTV Refinancings

Sickening. Just sickening. From the Washington Post article:

The effort is an acknowledgment by the administration that falling home prices limited the impact of its housing program, Making Home Affordable. Under the program, homeowners could refinance if their mortgage did not exceed the value of their home by more than 105 percent. Now, the administration is expanding the program to homeowners who are up to 125 percent underwater on their loan.

The refinancing program is central to the Making Home Affordable program, which also includes measures to help distressed borrowers stay in their home. But the refinancing program is focused on borrowers who are current on their mortgage but who can not take advantage of historically low mortgage rates because their home values have fallen. The refinancing program is still limited to borrowers with loans backed by Fannie Mae and Freddie Mac, the government-backed mortgage financing companies.

Who the deuce up in Washington thinks making terribly underwritten loans to borrowers that showed a fundamental lack of good judgement the first time around is a good idea? I think it was Ben Franklin that said the definition of insanity is doing the same thing over and over again and expecting it to come out different. If Franklin's right, then this is insanity.

We first reported on the ramifications of bumping LTV limits to 125% a few weeks ago. Apparently enslaving an entire swath of the population as indentured servants trapped under an untenable mortgage is part of The Administration's plan to ease the crisis. Good luck with that.

As friend of TILB Tom Woods will let anyone that's curious know, recognizing losses on bad debts and moving them through the system is inherent to creating a platform of stability that an economy can begin growing from. Allowing the system to self-cleanse lets people figure out who has capital, how much capital they have, and what is available to be invested in. Fairly useful questions. These are fundamental to capital owners choosing to deploy their capital.

Until then, capital will rest and wait. Any outcome that is not an outgrowth of natural cleansing is built off of a platform stabilized by twigs, string and hope.

The Tooth Fairy Economics of spending more money that we do not have as part of a solution continues unabated.

As an aside, can we please end the farce of these being publicly traded companies? The amount of loss that these two are going to eat and thus We The People are going to fund is going to make AIG look like child's play. Fan and Fred will generate hundreds of billions of losses before all is said and done.

Given that we are home renters, TILB is particularly offended by this sort of ugliness. It quite clearly brings to mind today's Liberty Quote of the Day by James Madison.

Sometimes we here at TILB feel like turning around, opening up our window, and verbally pillaging passerbyers with George Carlin's seven words.


[HT: KTB]

The Grand Unified Conspiracy Theory - Part I

We here at TILB have been referring to our Grand Unified Conspiracy Theory for well over a month now. What follows is the first in a two part series on The Grand Unified Conspiracy Theory. Part I outlines The Theory. Part II will show its applicability to nearly every government intervention to date.

As previously discussed on TILB, many of the governmental actions to date have the strange feeling of a coordinated effort to disembowel corporate America while burking free will into its perverted death throes.

Some may say it seems harsh to label this ugly trend a "conspiracy," yet it has many of the classic hallmarks. As Kurt Cobain said, sometime before hollowing out his head, "just because you're paranoid doesn't mean they aren't after you." While conspiratorial path began under President Bush, it has accelerated at a sickening pace under President Obama.

As with all conspiracies, the ability to decipher the actions begins with understanding the end goal.

We believe the goal is simple: control cash flows and direct them as desired to gain political ends. Whether or not it's a full fledged conspiracy, that goal seems obviously applicable and deceitful enough to create discomfort.

Working from the end forward, if we were conspiring to accomplish the aforementioned goal, we would want to do it in the least overt manner possible so as to maintain plausible deniability.

So the Chavez/Venezuela model, despite its appeal to ill-minded politicians, fails the basic sniff test of the average American and would be difficult to employ in The States. While that overt model meets the end goal, it does not fly in America, so we have to look for a path with lower resistance.

What if, rather than simply taking assets from owners against their will, we actually set up a structure that caused those owners to willfully surrender to our control?

That would seem to be the ideal.

As the legendary algebrist Jacobi is famed for saying, the secret to problem solving is to "invert, always invert." So, with our understanding of the end desires and a method that would work in America (get them to willfully give you their assets) well in mind, we can begin to imagine a means of accomplishing the goal:

1) Identify a big industry that is suffering from weakness, ideally a cyclical or temporary weakness. A lot of debt would be helpful as well. One final condition is key: many industry players need to be suffering from some weakness, not just one particularly poor player;

2) Identify the weakest sizeable player;

3) Deem that player "too important to fail" due to traits that are easily deliverable by the media and easily consumed by Joe Sixpack (e.g., "huge employer", statements of "systemic importance" such as "its collapse would cause the collapse of others", etc.);

4) Once we reach the brink of that important-but-weak company's collapse, step in as a funding provider of last resort in exchange for dominating control;

5) Prop up the failed company (FailedCo), disallowing its failure in a traditional sense thus preventing its competitors from absorbing the marketshare that would have been forfeit by FailedCo. This marketshare grab would have improved the health of all the remaining players but instead the opposite happens because...

6) ...the government, lacking a natural profit motive and supported by a theoretically infinite funding supply (a printing press and taxing authority), will operate FailedCo without a particularly profit driven motive. These non-economic behaviors harm competitors. Running the business in this manner will be easily justified with statements such as, "we need to ensure that FailedCo continues to operate at scale so that when we sell it back to private hands it generates enough proceeds to payback tax payers" or "we are not in the business of laying people off. We want to maintain the corpus of FailedCo until we find a permanent home for it." Countervailing voices can easily be surpressed with the mantra that they are greedy capitalists trying to benefit from the pain of the Average American.

7) In a world without interference in the markets when FailedCo actually failed, the competitors would have been strengthened in two ways: 1) marketshare grab from the disappearance or absorption of FailedCo; and 2) improved pricing as the surviving companies all endeavor to rebuild their balance sheets. However, in the conspiracy world, these participants continue to weaken as they compete with an overwhelmingly funded, non-economic competitor. This leads to the failure of the next weakest competitor (NextCo);

8) NextCo voluntarily comes to the government for its own bailout.

9) Rinse and repeat.

The process of having the government compete with private capital without a classic return-driven framework means that it will pound already weakened competitors into capitulation and these competitors will actually come to the government of their own volition for bailout, helping to further consolidate the government's power and control over cash flows.

This is elegant because most people will not be able to understand or simply will not believe the cause and effect.

While it has the exact same end game as simply nationalizing companies against their will (ala Chavez), it accomplishes that outcome in an obfuscated and seemingly voluntary manner.

Some people may say, "hey, TTB, that's ridiculous. Get off the Crazy Train."

In Part II of The Grand Unified Conspiracy Threory, we will address our sanity by walking through virtually every governmental interference in private companies and show its applicability.

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Let us know what you think? Are we crazy? If so, like a fox, or like a crazy person? If the latter, like John Nash or Kurt Cobain? If Kurt Cobain, like him before or after he off'd himself?