Reggie Middleton vs Goldman Sachs, Pt. Deux: Buy into a Collapsing Market to Fund Bonuses, PLEASE!!!

As a quick recap: I pointed out the illogical, self destructive,
circular relationship between Goldman and its clients/customers as
significant monies are lost following bad advice and purchasing trash
in the form of financial and investment products. See "Reggie Middleton vs Goldman Sachs, Round 1".
Goldman has recently issued a buy rating on the commercial REIT sector
(of course, Goldman has started underwriting and selling REIT
securities), something that I consider to be suicidal at best. Let's
take some anecdotal glances into the commercial real estate world to
see exactly what it is that Goldman would have us buy, and why.

In December of 2007, I wrote an article " Will the commercial real estate market fall? Of course it will", which I will excerpt from...

Sam
Zell, one of the most successful real estate investors of our time,
sold his Equity Office Properties Trust of Class A and B buildings to
Blackrock for what I assuredly thought was a fools price. When I saw
the numbers, I said easy money or not, there is an ass for every seat.
Well, little do I know. Blackrock found someone to pass the cherry on
to, and in near real time at that - and they paid even lower cap rates
than Blackrock did. Hats off to the Blackrock folk. You found the guys
at the very tip top of the market to drop those cap rates off on.

Now,
the problem for the last guys to buy these properties (as Sam Zell sits
there smiling on his $21 billion pile of cash) is that it is going to
be nigh impossible to find someone who will pay a ZERO cap rate, and
try as you might it will be damn hard to raise lease rates amongst an
economic hard landing and negative trending earnings... And thus, this
is the fate of commercial real estate. The many guys who overpaid, will
get burnt as values tumble from their peak bubble highs. Old school
real estate guys email me and say they never even heard of 5, 6 and 7
percent cap rates until recently (after 30 years in the biz). Well,
some of these guys are pushing zero (literally 1.5% to 3 and 4%).

 Let's fastforward to today, where we may learn the fate of those guys
who bought that CRE flip from Blackrock. From Crain's Chicago Business,
"Zombie fears stalk Tishman in the Loop"

A venture led by Tishman Speyer Properties L.P. has
defaulted on part of a package of loans used to finance the
$1.72-billion purchase of six prime downtown office towers during the
frenzied real estate market of 2007, sources familiar with the deal
say.

The New York developer bought the
5.7-million-square-foot portfolio from Blackstone Group, which flipped
them as part of the New York private-equity firm's $39-billion
leveraged buyout earlier that year of Sam Zell's Equity Office
Properties Trust. [Anybody reading my blog in 2007 or even knew me in 2006 could have seen this coming a mile away!]

The buildings, including such Loop landmarks as the Civic Opera
Building and the 10 & 30 S. Wacker Drive complex, have lost much of
their value amid the broad decline in the commercial real estate
market...

Tishman Speyer, led by longtime developer Jerry Speyer, is in
hard-nosed negotiations with officials of the Federal Reserve Bank of
New York to rework an estimated $1.4 billion in loans. The Fed inherited the mortgages as part of the 2008 collapse and sale of Wall Street investment bank Bear Stearns Cos. With the talks at a stalemate, the Fed is taking an aggressive tack, cutting off a key source of capital for leasing costs.

The portfolio, which also includes 161 N. Clark St.,
30 N. LaSalle St. and 1 N. Franklin St., already illustrates several
recent real estate trends, such as rapidly falling property values
after prices peaked thanks to large amounts of cheap debt. With
credit now virtually gone, defaults on downtown buildings are likely to
rise, forcing them into foreclosure or onto the market at big discounts
that will put more downward pressure on prices in a spiral similar to
the struggles of residential real estate across the country.

"Virtually all the assets bought between '05 and '07 cannot be refinanced today without a significant capital infusion,"
says Shawn Mobley, executive vice-president at real estate firm Grubb
& Ellis Co. "These buildings need to be recapitalized to get back
in the business of being active real estate."

Without a financial restructuring, the properties are
likely to join a new trend — "zombie buildings," which can't compete
for new tenants because they lack the money to cover brokers'
commissions and interior office reconstruction.
...
Many tenants won't consider zombie buildings because they need landlords' cash [for tenant improvements].

Avoiding a "Night of the Living Dead" scenario could be tough even for
an established firm like Tishman Speyer, whose local portfolio totals
12.2 million square feet.

A company-led venture is in default on a mezzanine loan
of undetermined size, part of an estimated $1.4-billion package of
mortgages, sources say. The loans come due next year but can be extended until 2012, sources say [when prices have corrected even farther, put your head in the sand].

... The
number of zombie buildings in the Chicago area is likely to grow in
2010, according to a forecast by California-based Grubb & Ellis.
For landlords, the trend means even top-quality office properties are
likely to divide themselves into "haves" and "have-nots," with the
latter seeing their vacancy rates worsen because of the lack of
financing. [SHHHH! You Freakin' Idiots! You didn't get the memo?!?!
Goldman just upgraded the sector! Goldman needs to underwrite REIT
securities to fund the 2010 $23 billion, 500% of the dividend payout
bonus pool]

 Even landlords that may have cash
are hoarding it. Dallas-based Behringer Harvard REIT I Inc., which owns
five downtown office buildings, says it is avoiding upfront costs by
cutting rents on existing leases in exchange for lengthening the
agreements.

From NYC's local real estate rags:

Midtown Manhattan sees double-digit drop in office rents, London's West End still world's most expensive office market
As commercial real estate floundered across the globe, the cost of
renting office space plummeted in some of the world’s most prominent
financial centers. On average, office markets saw a 7.7 percent decline
in rental expenses, according to a CB Richard Ellis report released
this week, but several dozen markets experienced drops in the
double-digits. Midtown Manhattan slipped to 24th on that list, at
$68.93 per square foot, down from its 15th-place ranking last year,
though it is still the most expensive office market in the U.S. Nearly
three-quarters of the 179 markets surveyed saw declines, and Singapore,
Hong Kong’s Central Business District, and Downtown New York City were
among those hit hardest. Those markets ranked second, fourth and ninth
for largest rental cost decreases with roughly 53 percent, 41 percent,
and 30 percent, respectively. Kiev, Ukraine came in first with a
crushing 65 percent drop. Meanwhile, the West End district in London
clung to its title as the world’s most expensive office market, with
costs averaging $184.85 per square foot. "While there are signs that
commercial real estate values are stabilizing in some markets in Asia
and parts of London, underlying property fundamentals are still weak,"
Raymond Torto, global chief economist at CBRE, said in a statement.

Stuyvesant Town ruling post-mortem report examines which properties are in danger

 New York City multi-family landlords who took advantage of the same J-51 tax abatement program that got Stuyvesant Town into legal trouble are facing legal battles of their own,
according to a Deutsche Bank report released this week. The report, a
culmination of an analysis of hundreds of these tax break recipients
whose loans are secured by commercial mortgage-backed securities,
said landlords of properties like the tony Belnord and the Ansonia on
the Upper West Side, as well as the Meyberry House on the Upper East
Side, would have to make due with decreased operating income as a
result of the October Stuyvesant Town ruling,
which stipulated that rents cannot be destabilized while J-51 is being
utilized. “In the longer term, owners may face decreased investor
demand for rent-stabilized properties since the growth rate of cash
flow is now severely limited,” the report said. Many rent-stabilized
buildings will not be able to increase
tenants' monthly payments until 2017, according to the report. The
Belnord, which has a loan balance of $375 million, topped Deutsche
Bank’s list of largest CMBS loans on properties affected by the
ruling.  [WSJ]

Experts see steep rise in deadbeat renters
The percent of residential apartment dwellers in the city who are not
paying their rent has as much as quadrupled since the market weakened
last year, industry leaders on a panel discussing multi-family
properties said earlier this week. "Collections, especially in New York
City, have become more of an issue," said Mark Stern, senior vice
president at Waterton Residential, a Chicago-based building owner and
operator. His firm is planning on making acquisitions in New York City.
"[They are] going from the 5 percent range to now 10 or 20 percent in
collections, which makes a difference on the bottom line," he said.
Mason Sleeper, a principal with the real estate investment firm
Praedium Group, said he has seen a similar distress in the market. "You
have your collection issue which is increasingly creeping up to
becoming a little bit of a problem," he said. They were speaking on a
panel that also included Kevin Davis, partner of Area Property
Partners; Tim Wang, vice president at ING Clarion and Max Herzog,
senior vice president at CB Richard Ellis. The panel, moderated by Mike
Kelly, president of Caldera Asset Management, was part of a day-long
forum covering multi-family real estate organized by GreenPearl.

NYC real estate pounded with layoffs
The New York City real estate industry shed 600 broker-related jobs in
October, bringing the 2009 tally thus far to 5,700, or 4.7 percent of
that sector's labor force, according to a new employment report from
Eastern Consolidated. Nationwide, brokerage firms cut 2,200 employees
during the month, for a current total of 105,500 job losses, or 5.1
percent, since December 2008. The construction industry alone, however,
is weathering a more serious fallout. A whopping 16,300 New York City
construction jobs -- 12.3 percent -- were lost during the month, though
that was only a fraction of the nearly 1.6 million construction
employees terminated across the country, who comprised 20.7 percent of
the industry. TRD  

Michael Stoler -- "Extend and pretend," the new rule for commercial real estate loans
As the fall of 2009 comes to a close, many of the commercial real
estate lenders continue to limit their exposure to financing for real
estate. The buzzword for 2009 is "extend and pretend," whereby a bank extends the term of a loan to a later date. The legendary Samuel Zell,
chairman of Equity Group Investments, the keynote speaker at the NYU
Capital Markets conference Nov. 19, stated that "our government has
become the bailout city. If a loan is kept current, banks will 'pretend
and extend.'" No one is surprised by the "pretend and extend concept,"
especially if you had the opportunity to gain insight from the Federal
Reserve's October 2009 Senior Loan Officer Opinion Survey on Bank
Lending Practices and hear the comments made by Ben Bernanke, chairman
of the Federal Reserve, in a speech at the Economic Club of New York
Nov. 16 

Dubai impact on NYC limited to distressed hotels, but signals end to sovereign wealth rescue
As the international credit crisis spread into the kingdom of the
United Arab Emirates, real estate experts said that while any direct
impact on New York would be limited, it may signal the inability of
sovereign wealth funds to bail out distressed assets here. The
financial world briefly shuddered last week after Dubai World, the main
investment arm of the powerful Gulf region city-state, asked lenders
for a six-month suspension of nearly $60 billion in debt payments.
Analysts say the suspension may force Dubai to sell many of its trophy
assets around the world, including several high-profile buildings in
New York, like the Jumeriah Essex House, the former Knickerbocker Hotel
and the flagship W New York-Union Square hotel, whose mezzanine debt is
scheduled for a Dec. 8 foreclosure auction. “Dubai got drunk with debt
just like we did here in New York,” said Dan Fasulo, managing director
of research at Manhattan-based investment research firm Real Capital
Analytics. “A lot of people think Dubai [was financing its deals with]
oil. In actuality, it was very much of a debt-fueled building boom.”   

So, hopefully, between my link-dense introductory post and this
anecdotal 'semblage of newsbytes you can fathom that there may be a
rather selfish motive to

Goldman's CRE sector update. Let's suppose you are an institutional
investor that may have doubts that Goldman has been/is/will act in your
best interests. What should you do? Well, for one, I would unplug my
ass from the Matrix and shake that dizzying spell of "Goldman is the
best in the world-itis", and pay more attention to the smaller,
independent, and considerably less non-conflicted sources of analysis,
data and opinion. This does NOT include the major rating agencies. As I
have stated in the past, if your research sources benefits from
transactions in the marketplace and/or sales, you had most asuredely
best be on the same side of the trade that they are on. Goldman clients
cannot say this!

Lets revisit Goldman's sector upgrade - "Goldman Sachs Upgraded US REITS to Neutral; Ups BKD, AVB, GGWPQ, Downgrades KIM" in which they probably don't have anything on the underwriting calendar for KIM (hence the downgrade), and they have upgraded GGP
from sell to neutral (after it has fallen from $60 to pennies and has
filed for bankruptcy, thanks fellas - I would have done better reading
a blog). Notice that they have also upgraded Taubman, whom I have done a decent amount of analysis on for my subscribers (The Taubman Properties Research is Now Available).
What are the odds that a Taubman underwriting is in the pipeline? Did
you know that Goldman packaged Taubman mortgages into CMBS already?
Let's take a look at how those mortgaged properties are faring (keeping
in mind how well [horribly] investors fared in that RMBS offering
illustrated in my last vs GS post, see graphic)...

In 2006, Goldman issued CMBS to institutional investors (mostly
insurance companies and asset managers) under the moniker GSMS 2006 -
GG6, with 19 tranches from junk to AAA rated under both Fitch and
S&P (Uh Oh! See the sidebar below for what is happening to S&P rated CMBS debt).
This included the mortgages financing the Northlake Mall and the Mall
at Wellington GreenTaubman properties - one of which is just about at
the underwater mark, and the other that is already past the
refinanceable LTV limit imposed by the newly prudent, risk averse CRE
financing market. When the CMBS was sold to the investors, the max LTV
could not have been more than 70, and was probably less. As you can
see, things can get much worse, quite quickly. I anticipate one these
properties to be completely underwater by 2010 year end and the other
to need a significant equity infusion by suckers, victims future Goldman clients.

What the investors should be concerned about is that although the
properties are not quite under water yet, the macro and fundamental
trends are heading sharply downward and the debt behind them currently
cannot be rolled over without a significant equity infusion. I would
assume mezz debt would be out of the question. Now, of course there is
a diversity of properties other than Taubman behind these derivatives (just as thier was in the GSAMP Trust RMBS offering graphic above, hint, hint!), but if GS recommends Taubman, one must assume that GS considers Taubman to be one of the better players (or GS is preparing to do another Taubman offering, which is the wager I'd put my money on).

As in the RBMS scenario above, as the underlying properties decrease in
value, the lower tranches of the CMBS face the possibility of a total
wipeout, and even the higher rated ones fave the possiblity of material
risk. Is this the AAA comfort and complacency that you had in mind when
you reached for that measly blip of several basis points in additional
yield over treasuries??? When dealing with the big name brand banks
that need to fund $19 billion bonus pools, it is not necessarily return
on your capital that you need to be concerned with. Its the return OF
your capital, lest it wind up in the GS bonus pool!!!

The German Reinsurance Company, the Japanese and American asset
managers, and the US life insurer that bought heavily into this "bound
to make your career" CMBS offering from Goldman are welcome to contact me.
Believe it or not, there are CMBS offerings floated by other "name
brand" banks that have done even worse in terms of the properties that
are backing them. I will get into that in my next post, and give
Goldman Sachs a break, after all, they are about to lose half of their (very hard to conceive that they deserved) bonsues. See Darling
Places 50% Levy on U.K. Bank Bonuses, Will Raise Wage Taxes in '11.
Can you believe it. The capital goes from GS clients who followed GS
advice and bought GS products to GS's bonus pool, just to end up in the
hand of the UK taxing authority. I'll bet your left nipple that
congress is weighing their options as I type this. I warned my readers
for months that GS upper management was pushing their luck much, much
too hard. One would think they actually started drinking their own
Kool-Aid marketing in believing that "Masters of the Universe" stuff.
They strutted and dared, and taunted and just very well might have
created a precedent that would prove most difficult to unwind.

Darling actually had darling of a soundbite that I just couldn't resist posting:

“There are some banks who still believe their priority is to pay substantial
bonuses,” Darling said in Parliament. [Nawwww!!! Say it ain't true!] “I am giving them a choice. They can use
their profits to build up their capital base. If they insist on paying
substantial rewards, I am determined to claw money back for the taxpayer.” 

What
are the chances that the bankers would rather take shareholder capital
and increase the bonus amount to compensate for the tax increase than do something a little more,, umm,,, shareholder friendly with it? What
are the chances the sheepish shareholders would just sit back and let
them do it? After all, the lion's share of net revenue ALREADY goes to
the bonus pool as it is, right???

 S&P Looks to be Taken Seriously???

As per our analysis S&P has,
of late, been very aggressive in reducing its ratings for the CMBS tranches in
the last six months as it changed its rating methodology in May 2009, which had
the impact of downgrading most of 2005-2008 CMBS classes. Note the reporting from ZeroHedge.

Moreover, we believe that a
large percentage of the downward revision in the ratings must have been done by
now as S&P initially intended to roll out its results from new methodology
over the next 3-6 months, after it had launched the new methodology in May
2009.

Below is the comparative S&P
rating for most MSC 2007-HQ12 CMBS tranches issued for Deptford Mall from MAC's
portfolio, for your reference:

S&P Rating
	7-Apr-09	9-Sep-09
MSC 2007 - HQ12 AJFL	AAA-	B+
MSC 2007 - HQ12 AJ	AAA-	B+
MSC 2007 - HQ12 B	AAA-	B+
MSC 2007 - HQ12 D	A-	B
MSC 2007 - HQ12 F	BBB+-	B-
MSC 2007 - HQ12 G	BBB-	B-
MSC 2007 - HQ12 C	AA--	B
MSC 2007 - HQ12 H	BBB--	B-
MSC 2007 - HQ12 E	A--	B
MSC 2007 - HQ12 J	BB+-	B-
MSC 2007 - HQ12 L	BB--	CCC+
MSC 2007 - HQ12 N	B-	CCC
MSC 2007 - HQ12 K	BB-	CCC+
MSC 2007 - HQ12 M	B+-	CCC+
MSC 2007 - HQ12 O	B--	CCC
MSC 2007 - HQ12 P	CCC+-	CCC
MSC 2007 - HQ12 Q	CCC-	CCC

Comments

[Anonymous]

You get what you get. He should have flushed his opinion down the toilet. He would still have a job.

www.onlineuniversalwork.com

[Anonymous]

Everyone has their favorite way of using the internet. Many of us search to find what we want, click in to a specific website, read what’s available and click out. That’s not necessarily a bad thing because it’s efficient. We learn to tune out things we don’t need and go straight for what’s essential.

parttime money

[Anonymous]

Government F*cking Sachs needs to be shut down.

They are a criminal organization.

I could not be more serious.

[Anonymous]

Excellent research - but you are wrong on this tax situation as Darling claimed himself they only expect to collect 550 mio. - hence those 50 % do not refer to most bonus payments and Goldman employs most people in the USA not GB. We can only hope that Geithner comes up with the same idea - same probability as you win the national lottery I guess. The Rothschild/Rockefeller gang does anyway not care what their droid bankers earn at the end of the day - they made/make 10 times the money taxfree with their charities. I rather suspect that Sam Zell is part of the family as is Blackrock - they sold most of the properties within hours. The trade was orchestrated obviously and those institutional money was framed deliberately.

[Anonymous]

If you were a CEO, what department would you want to drive your companies profits??

If you said sales, you would probably be in agreement with 80% of the responses.

If you said finance/accounting, your company will most likely go out of business.

Now, if the US economy, or world economy for that matter, was a business, what sector (department) would you want to drive your economic profits (GDP)?

If you said wall street (finance/accounting), you are witnessing our current plight, and we all must wonder if the economy will ever recover.

[Anonymous]

Hey Idiot - What do you think 'revenue', 'profit', and 'GDP' are?

[Anonymous]

Great job Reggie! Bernie Madoff was merely an appetizer.

[Anonymous]

END GOLDMAN!!

The ultimate PONZI creators!

[Anonymous]

These guys at GS stink ... The cheap rats!!

[Anonymous]

We need valuable talent to become schoolteachers and engineers. Why is there only valuable talent on Wall Street, where it never seems to help?

[Anonymous]

Yes, well, if you could answer that question you'd probably already be working on wall street.

We just want to fit in.

[Anonymous]

yeah, why can't there be a "value added to society" bonus. A teacher would kick a GS ass to the clouds on that value-add.

I mean really, does taking money from Granny's 401K by out trading her make them Socially Responsible, god's business doing Capitalists that should be so well compensated. Hell no.

On a value added to society bonus plan those F-cks would be owing us all some cash back.

[Señor Tranche]

Most teachers I had would have a negative value added for wasting my time with BS that I never use in the real world. 

[Reggie Middleton]

From Bloomberg, a little too little, too late???
Dec. 9 (Bloomberg) -- Goldman Sachs Group Inc., the most profitable firm in Wall Street history, is taking a “very hard look” at whether to pay people less because of public outrage over bonuses, board member William George said.

Goldman Sachs set aside 47 percent of revenue for compensation and benefits through the third quarter, enough to pay each employee more than $500,000 for nine month’s work. George, a professor at Harvard Business School who sits on the New York-based bank’s compensation committee, said the board may lower the percentage this year and in the future.

Here's another interesting quip from the same article:

‘Irresponsibly High’

Treasury Secretary Timothy Geithner last week disputed claims by Goldman Sachs executives that the firm could have survived without help from the government and called for an end to “irresponsibly high bonuses” on Wall Street. Goldman Sachs Chief Executive Officer Lloyd Blankfein favors a “pay for performance” culture, and a posting on the firm’s Web site says that approach “incentivizes employees to create long-term value for shareholders.”

George, who was CEO of Medtronic Inc., the medical-devices maker, from 1991 to 2001, said Goldman Sachs “isn’t tuning it out” when criticisms are made about compensation.

“There will clearly be bonuses paid this year, but I think one has to look at it in relation to the profits,” said George, who joined Goldman Sachs’s board in 2002. “Wall Street historically has paid out a high percentage of its pre- compensation profits, but I think that’s being closely looked at right now.”

In 2007, when Goldman paid employees a record $20.1 billion, the firm set aside 43.9 percent of revenue for compensation and benefits. Last year, the so-called comp ratio rose to 48 percent. The percentage typically drops in the fourth quarter.

I think bonuses need to be looked at from a risk-adjusted, unsubsidized perspectives. Without the subsidies, GS would not exist now, PERIOD! With the subsidies, and adjusted for risk, you will still have to do a lot of chopping. Sometimes, some people just don't know how good they have it - at least until they no longer have it.

If Goldman has so much valuable talent that would flee if compensation is dropped, drop compensation universally across the board for money center and systemic risk banks let whoever feels their sh1t doesn't stink strike out on their own to run their own shops. That way they can see, as will we, what they are truly worth in the market place. Methinks, many will starve, and quite a few will take up teaching as a new profession. Trust me, as an entrepeneur, it ain't easy and the world won't suffer a pompous attitude without the ability to perform without subsidies.

[Budd Fox]

I run a business myself...self employed and with 6 people on the pay roll. Financial services...but value added as we saved client's money in 2008. To keep everyone on board I cut mine and my partner's salaries 40%...we came through.

In the next year budget we go back at 80% what we were making in early 2007. But one of the employees I kept is a now single mom with 3 young kids going through a nasty divorce. We all managed to keep paying our relative mortgages...and I still subsidize the Friday Morning Tea/Lunch, in which we still manage to have some fun. Believe me, as Reggie is showing, you can still work in financial services , add value, be concerned for your clients..and be socially responsible at least towards your small world around you.

But I don't work at Goldman Sachs, I slug it out by meself...and I surely don't make half a million bucks a year.

But no one hates me...or call me names. :)

Demagogical rethorics ?? Maybe...but I'll stick to it, thanks.

[Reggie Middleton]

+ 22,222

[Anonymous]

Ponzi