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Morgan Stanley Jingle Mail: Loses Properties To John Paulson Investment Consortium & Itself
A while back, I posted a piece aptly named “Doesn’t Morgan Stanley Read My Blog?”,
wherein I lamented on the fact that I made very clear in 2007 that
anyone who bought the Sam Zell/Blackstone flips were guaranteed to lose
money. It was literally etched in stone for anyone with an objective
view and a calculator. I actually believe it was a miracle that
Blackstone didn’t lose their shirt. Well, guess who bought those
buildings on behalf of their clients as they raked in the fees (see Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!).
You guessed it. None other than Morgan Stanley. This purchase was a
100% equity loss. The entire client fund apparently lost about 61% of
the shareholder’s/LP's money. See this WSJ article: Morgan Stanley Property Fund Faces $5.4 Billion Loss.
Well, Morgan Stanley’s profitable (from a fee perspective) Real Estate division is in the news again. Bloomberg reports, Paulson Group Said to Seize Some CNL Hotels From Morgan Stanley:
A lender group including Paulson & Co., the New York-based hedge fund run by John Paulson, seized control of former CNL Hotels & Resorts Inc. properties from Morgan Stanley’s real estate funds through a $600 million debt restructuring, said two people with knowledge of the deal.
The transaction involves the
corporate debt used to finance Morgan Stanley’s 2007 acquisition of the
hotel owner near the peak of the real estate market. Under the terms of
the restructuring, $200 million of corporate debt was extinguished and
$400 million was converted into equity, said the people, who asked not
to be identified because the information is private.
In addition to Paulson, the lenders are Winthrop Realty Trust, Capital Trust Inc. and Morgan Stanley’s special property group, according to the people.
In The
Conundrum of Commercial Real Estate Stocks: In a CRE “Near
Depression”, Why Are REIT Shares Still So High and Which Ones to Short? I illustrated, in full detail, the reasons why I believe CRE is apparently floating in mid air, among them were:
- Conflict of Interest Number 1: The Managers of CRE Investment Funds
Are Paid to Do Deals, Not Necessarily to Make Their Investors Money! (I
offered readers a downloadable model that clearly delineates the free
put option that makes fee generation trump performance incentives). - Conflict of Interest Number 2: Those Banks That Are Selling and
Recommending REIT Securities and CRE Investments Are The Same Banks That
Got In Trouble Holding Said (Underperforming and Underwater)
Securities and Needed to Dump Them On Naive Investors.
These funds did very well during the
boom, but when the obvious bust came (and I blogged about it in full
detail, so no one could say they didn’t see it coming), these funds
crashed. Professional asset managers should know better. They are
simply delivering leveraged market beta, not alpha. Investors are
paying a fortune in fees to ride the mortgaged ups and downs of the
real estate market.
Here’s another tidbit of
information. Some of the banks that sponsored these investment funds
also helped arrange the financing of the buildings that the funds
bought. Without discussing the wide implications of this potential and
actual conflict of interest, it remains to be said that if the building
goes underwater, the lenders (which were often the banks) were
underwater on the deals as well. The banks were underwater obviously
need to get out from under these securities. What’s the easiest way to
do that? Upgrade the sector and sell them to suckers, that’s how…
As stated Reggie Middleton vs Goldman Sachs, part 1, For Those Who Chose Not To Heed My Warning About Buying Products From Name Brand Wall Street Banks, and “Blog vs. Broker, whom do you trust!”,
Goldman’s peddling of products often spells doom for the consumer
(client) and bonus for the producer (Goldman). Goldman is now
underwriting CMBS under a broad fund our $19 billion bonus pool “buy”
recommendation in the CRE REIT space reference Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off .Now,
after all of the evidence that I have presented against the CRE space,
who do you think would be better for clients net worth, Reggie’s
BoomBustBlog or Goldman?
Bulleted point number one above , hopefully, I have made obvious to
most by now. Bulleted point number two is illustrated right in this
Bloomberg article. You see, Morgan Stanley created a leveraged CRE fund
and sold it to clients (pension funds, HNWs and foreigners) in such a
fashion as to profit no matter how the market performed despite the fact
the market was in an obvious bubble. Morgan Stanley also loaned its own
client fund the monies to buy into the bubble. When the shit hit the
fan and Morgan Stanley’s actual balance sheet was threatened (as opposed
to their client’s balance sheets), they foreclosed on the client’s fund
properties. What couldn’t be salvaged was upgraded (as in the REIT
sector) as a buy in order to create the room to sell CMBS and dump the
trash that the banks didn’t want on unsuspecting advisory clients
(again, when will we learn our lessons). Now, back to the Bloomberg
article…
The restructuring, completed Jan. 6, gave the group control of eight luxury resorts, one of the people said. Morgan Stanley’s real estate funds have the right to participate in future capital raising, they said.
… Morgan Stanley has suffered losses
from its real estate funds after the credit crisis pummeled property
values and soured deals made at peak prices. The company bought CNL
Hotels in 2007 [the tippy top of the CRE bubble, with Morgan Stanley leveraged client monies!]
for about $6.7 billion, adding luxury resorts including the Grand
Wailea Resort Hotel & Spa in Maui; La Quinta Resort & Club and
PGA West in La Quinta, California; and the Arizona Biltmore Resort & Spa in Phoenix.
… Morgan Stanley booked about $4.4
billion in real estate losses in 2008 and 2009. In November 2009, Morgan
Stanley agreed to hand over Crescent Real Estate Equities to Barclays Capital, ending its obligation on a $2 billion loan.
… One of the firm’s property funds
defaulted in July 2009 on a $192.5 million mortgage on the Maui Prince
Hotel in Hawaii, prompting Wells Fargo & Co. to foreclose. The fund
bought the golf resort with a Hawaiian developer for $575 million in
2007.
Related posts:
- Davidowitz On Overt Optimism In The Retail Space And Mall REITs, Stuff Which We Have Detailed Often In The Past Friday, December 31st, 2010
- Even at Marquis Trump Properties, Your Lyin’ Eyes are Belying the Real Estate is Bottoming Mantra Tuesday, August 31st, 2010
- Even With Clawbacks, the House Always Wins in Private Equity Funds Friday, August 27th, 2010
- Commercial
Real Estate Continues to Dropped into Foreclosure as the Landlords of
Said Properties Enjoy Skyrocketing Share Prices? Yep, Makes Plenty of
Sense Friday, August 6th, 2010 - The REIT Fundamental Performance vs Share Price Performance Heat Map is Available for Download Monday, January 11th, 2010
- Commercial Real Estate is Pretty Much Doing What We Expected It To Do, Returning to Reality Wednesday, May 19th, 2010
- Commercial Delinquencies Rise Again, Data Goes Ignored Monday, April 12th, 2010
- The Taubman Properties Q4-2009 Earnings Opinion: The CRE Trend Continues as Expected Thursday, February 11th, 2010
- Deflation, Inflation or Stagflation – You Be the Judge! Tuesday, January 12th, 2010
- Thoughts on Ackman’s GGP analysis and trade Tuesday, December 29th, 2009
- Wall Street is Back to Paying Big Bonuses. Are You Sharing in this New Found Prosperity? Tuesday, December 29th, 2009
- Doesn’t Morgan Stanley Read My Blog? Thursday, December 17th, 2009
- It Doesn’t Take a Genius to Figure Out How This Will End Thursday, December 31st, 2009
- Bad CRE, Rotten Home Loans, and the End of US Banking Prominence? Thursday, November 12th, 2009
- advertisements -


I’m watching rich people mismanage physical real estate too, but on a smaller scale. I’m vacationing in the Florida Keys in a private community with everything from 1950’s vintage 800 sf fishing cabins to more recently built ocean front McMansions in the 5000+ sf flamboyantly gaudy class. The smaller homes are mostly occupied with owners and vacationing tenants who are visibly partying like it’s 1999. The larger homes are mostly empty and for sale; offered at 50-60% of their peak market price with no buyers in sight. Some (soon to be short sales and foreclosures I'm sure) were purchased in the hey days of 2006-2007 by local realtors on spec. Many of these giant homes are already looking pretty shabby now as owners have cut back on maintenance to reduce operating costs.
The rich bankers and financiers of the world (who probably own several McMansions in prime locations) may have managed to manipulate the mortgage market in their favor, but, when it comes to managing their own physical real estate they are as inept as a peg legged dancer. It would be hilarious to watch if they weren’t dragging everyone else’s property values down with theirs.
Good work, Reggie- as always- you see thru the garbage. I'd feel like a mushroom without you!
In The Devil's Advocate one lawyer advises another on how to deal with a client: "Ride them until they drop. Then eat them."
Looks like the maggots are about to pour out of this carcass.
When they are done with what is edible, they emerge and transform.
I'm sure that somehow, someway, we're going to end up paying more for something to support this gift to the elite.
We always pay for it. With a smile on our totally oblivious faces.
The shit just keeps getting deeper and sales of Brittany Spears new perfumes increase. Apparently to cover the stench.
Party on.
From the Bloomberg article it seems that Paulson paid $3.5 billion for the hotels that MS bought in 2007 for $6.7 billion.
Price matters. Apparently now those hotels make sense.
how have they been able to keep the commercial real estate crash quiet/contained ????
Noticed that myself... doesn't seem to be alot of coverage on this topic.
The (COI <> illusion)[structure][players.vs.suckers] is just a matter of "what are you blind to" and everyone is blind to something.
Players and Suckers.
well that darn john paulson just over paid for real estate for his third or fourth house. these clowns are really just comparing their penis size, oh i mean portfolio envy size. oh you know what i mean. look look reggie, keep up ^ your good work†
Reggie - always clear and concise, never a drip.
Ignore Reggie at your own peril, Mr. AssetMgr!
Thanks Reggie, as always, Brilliant!
+1, huge thanks Reggie!
Wow, what a mess. Our markets are a fraudsters dream.
It's amazing that just some hard work and objective looks reveals the stink and yet people still by this crap.
Thanks Reggie.