RealEstateFlux

The weekend was unkind to Lehman Brothers as the leaders of Wall Street met to consider their fate and a possible buy out of the investment bank and influential commercial real estate player. Yet after Bank of America and Barclays examined Lehman’s books, they balked. There were no other takers. Apparently no bids for Lehman’s distressed assets were viable, or in and of themselves would have forced Lehman into bankruptcy. Therefore, the cleaner solution became a Chapter 11 filing at the holding company level.

Bloomberg | Peter Robison & Yalman Onaran | September 15, 2008

Fuld waited too long to write off bad debt, then didn’t act quickly enough to sell a stake to raise capital, said Richard Bove, an analyst with Ladenburg Thalmann & Co. In the third quarter, Lehman said it reduced its exposure to residential mortgages 31 percent to $17.2 billion and commercial real estate 18 percent to $32.6 billion. New York- based Merrill Lynch & Co. moved faster under new CEO John Thain, agreeing July 29 to liquidate more than half of its mortgage-linked securities at a fifth of their price and raising $8.55 billion in capital.

Seeking Alpha | J.D. Steinhilber | September 15, 2008

Going into the weekend, the outcome Wall Street was expecting was a buyout of Lehman Brothers. Instead, it got a Lehman bankruptcy, a buyout of Merrill and increased pressure on AIG. These developments have intensified fears of a financial panic.

The New York Times | Joe Nocera | September 15, 2008

Ever since the crisis took hold last summer, most of the big firms have been a day late and dollar short in admitting that their once triple-A rated mortgage-backed securities just weren’t worth very much. And, one by one, it is killing them.

After months of uncertainty, a resolution is at hand for Lehman Brothers. Once a preeminent force in commercial real estate lending, the overextended investment bank is in forced sales talks, hosted by U.S. financial regulators. In spite of CEO Richard Fuld’s announcement earlier this week that the struggling bank had settled upon a restructuring plan, the equities markets voted down the planned measures with massive sales pressure. Lehman’s public shares are down over 90% since last February.

At the root of Lehman’s demise has been an aggressive contrarian bet; a year ago when commercial real estate markets began to slow, Lehman continued pumping out debt and equity investments while many of its peers were reigning in. For the last several months Lehman has been desperately trying to sell these investments, to no avail. Unfortunately, Lehman’s exit strategy for its commercial real estate investments had vanished. Just 12 - 18 months ago, Lehman was regularly feeding its securitization program vast chunks of CRE mortgage debt which were regularly sold off to bond investors, but now these markets are frozen.

The forced sale of Lehman Brothers is a welcome conclusion to the gory saga of Lehman’s implosion. Of course, any strategy which would have sustained Lehman would have been preferable. Yet the months of uncertainty regarding Lehman’s future have weighed heavily on the financial markets. Lehman has been a high profile train wreck, strewing wreckage in slow motion.

Assuming that Bank of America, Nomura, or HSBC is able to acquire and stabilize their platform, our financial system will more quickly get over it and move on. An important question is what level of guarantees the federal government will need to extend to Lehman’s buyers?