Commentaries

Goldman’s real estate gambit

Is history repeating itself at Goldman Sachs?

In late 2006, Goldman shrewdly began backing away from the residential mortgage market. With little fanfare, the firm began aggressively hedging its exposure to home loans, in particular mortgages to borrowers with shaky credit histories.

This savvy and somewhat stealthy strategy enabled Goldman to pawn off lots of its soon-to-be toxic mortgages and mortgage-backed securities on other institutions — forcing those foolhardy speculators to pay the price when the subprime market blew up.

And much to everyone else’s chagrin, Goldman even made money off the housing meltdown when some of its hedges — specifically a bet that a subprime mortgage index would plunge — paid off handsomely.

It appears Goldman is following a similar script with U.S. commercial real estate, the next big asset class that many believe is on the verge of disaster.

Goldman recently reported owning $6.4 billion in commercial mortgage loans. It also is holding some $1.6 billion in commercial mortgage-backed securities, or CMBS. That’s a big retreat from where it was just two years ago.

And in a sure sign that Goldman expects a good number of commercial real estate borrowers to default, the firm says it marked down the overall value of its commercial mortgages portfolio by nearly 50 percent.

L-shaped housing market?

Economists seem willing to celebrate even the most tepid economic release these days. The National Association of Homebuilders’ Housing Market Index nudged up slightly to 17 in July, up from 15. Most economists had expected 16, so this is what passes for good news.

But the improvement is tepid indeed considering the record lows the index has hit. Even most dead cats bounce more vigorously than this.

The report pointed to an improvement in the low end of the market. Joshua Shapiro at MFR believes that this segment of the market at least may be nearing a bottom. He is less sanguine about the fortunes of middle and higher priced houses.

Many economists are assuming that a stabilization in the housing market is the inevitable first step towards a recovery. I would suggest gloomier possibility. The recent period of calm could simply be a pause for breath on the way down. The fact that this decline will probably be quite slow is cold comfort.

There is still an imposing inventory of unsold homes. Unemployment continues to rise. The interest rate of the 30-year mortgage is still well above its low point. As a suffering homeowner myself, it pains me to say that an L-shaped housing market may be the best we can hope for over the next few years.

No real estate revival for corporate lawyers

The big corporate law firm Cadwalader, Wickersham & Taft isn’t expecting a rebound in the real estate market anytime soon, so it’s asking nearly three-dozen lawyers to take the next year off.

The New York law firm confirmed, in an email statement, that it has asked “34 lawyers to accept a one year, unrestricted sabbatical,” during which the attorneys will receive “one-third of their current compenstaion and medical benefits.”

Cadwalader says it has no choice to put its real estate lawyers on extended vacation. “The debt market, particularly the real estate debt markets, remain very slow.” And that means the firm doesn’t “have enough challenging work” to keep those lawyers busy. Of course, that means putting in all those billable hours into the wee hours of the night.

Now we don’t expect a lot of tears to be shed over a few lawyers losing their jobs. There’s not a lot of crying going on over all the jobs lost on Wall Street.

But  this is an indication that a rebound in the real estate market is still a long way off and that’s not good news for the economy or the financial sector.

Here’s the official firm statement:

The debt markets, particularly the real estate debt markets, remain very slow. As a result, Cadwalader’s Capital Markets and Real Estate Finance groups do not have enough challenging work for all the lawyers, particularly the young lawyers, in these groups. Unfortunately, two years into this financial crisis, there are no near term solutions for the problems which vex these markets. In order to address this situation, Cadwalader has asked 34 lawyers to accept a one year, unrestricted sabbatical. During the sabbatical, participating lawyers will receive one-third of their current compensation and medical benefits. In addition, a committee comprised of partners and senior administrators will work diligently to place these lawyers with clients, prospective clients, and not-for-profit organizations.

Goldman still puzzles

Investing in Goldman Sachs still requires a leap of faith in the investment firm’s ability to out-trade, out-wit and out-muscle everyone else on Wall Street.

Sure, the bulls will say that with fewer competitors and with the Federal Reserve keeping bank borrowing costs near zero, Goldman’s traders should be able to print money. But here’s the thing: The post-federal bailout version of Goldman is as much of an investing riddle as the pre-crisis Goldman that many critics called a giant hedge fund or an inscrutable black box.

Even after becoming a bank holding company last fall, Goldman still doesn’t make it easy for investors to get their arms around all the firm’s many moving pieces. Trying to get a clear picture of how Goldman makes all that money and where the risks to its profitability may be lurking is like embarking on a treasure hunt with a ripped map.

Here’s an example. Go to the section of Goldman’s most recent 10-K where there is a list of the firm’s “significant subsidiaries.” There you’ll find the names of some 115 companies and where each was incorporated.

That may sound like a lot, but that figure just scratches the surface. In all, Goldman has more than 800 subsidiaries operating around the globe. But Goldman never discloses the identities of the vast majority of those subsidiaries anywhere in its annual report.

Now technically, Goldman, which declined to comment, doesn’t have to disclose information about so-called insignificant subsidiaries. Securities and Exchange Commission regulations, relying on a complicated formula, only require companies to disclose the identities of subsidiaries that account for a “significant” percentage of a company’s income. But not all financial firms play it so close to the vest. Morgan Stanley, for instance, lists the names of every single one of its 1,300 subsidiaries in its 10-K. The list is so long it takes up 26 pages.

Actually, there is a place to find a more detailed list of all of Goldman’s subsidiaries and that’s in the regulatory filings for its small insurance firm, Commonwealth Annuity and Life Insurance Company.

Real estate far from sorted

With headlines like this and that, it’s hard to get too excited about green shoots flowering into a full-fledged recovery.  Option-ARM resets are still looming – though lower short-term rates could make the pain more manageable for some – while ballooning payments in the commercial mortgage market could mean big losses for CMBS investors.

Somebody loves A.I.G.

A.I.G.’s headquarters, that is.  Preservatationists have written to the New York City Landmarks Preservation Commission asking that American International Group’s Art Deco tower on 70 Pine Street in lower Manhattan be designated a city landmark, the New York Post reports.   A.I.G. is trying to sell the tower, as well as a connecting building at 72 Wall Street, and the preservationists are worried that a new owner may ruin the period details that make the building so distinctive.

Crain’s New York Business has estimated that 70 Pine Street could reap between $78 million and $116 million in a sale.

The 66-story building was built in 1932 and was designed by the firm of Clinton & Russell, Holton & George. A.I.G. bought the building in 1976. One of the fascinating features of the building used to be its double-deck elevators.  As Christopher Gray explained in the New York Times in 1998:

As soon as the doors of both cabs closed, the double cab went up, stopping at, for instance, the 29/30th floors, the 31st/32d floors, and so on to the 59th/60th floors. Double-deck service was restricted to peak periods; at other times half the cabs were closed and the elevators stopped on all floors.

Unless the cab stopped without opening its door — a sign that the other cab was opening on another floor — passengers were not particularly aware of the double-deck operation. Perhaps they were still recovering from the lobby, an eye-burning Art Deco symphony of figured marble in high colors and sinuous metalwork.

In my one visit to 70 Pine Street, I thought its interiors looked a little drab and run down, at least compared with the bright modern spaces of most other big financial companies.  Then again, Art Deco doesn’t do much for me. It may also not do much for A.I.G.  To be surrounded by a style that harks back to the last great global financial crisis may be uncomfortable when you are trying to move past the current one.