Another bank is suffering from the mortgage crisis fall-out. Actually, the New York Times says Lehman Brothers is in an “all-out fight for its survival.”
The bank was a major underwriter of mortgage-related securities before the subprime crisis hit, and it’s shares are down 90 percent from last year. It’s situation wasn’t helped this week when it’s stocks lost 45 percent of their value in the wake of the Freddie Mac and Fannie Mae bail-out:
Lehman’s announcement came a day after the bank’s shares plunged 45 percent to $7.79 a share following reports that its efforts to secure a strategic investment from Korea Development Bank had failed. Investors also feared that the federal government would not bail out Lehman as it has mortgage giants Fannie Mae and Freddie Mac and investment bank Bear Stearns.
From the sounds of that, Lehman went looking to Korea for a bail-out.
The bank’s managers say it’s an “extraordinary time” for their industry and “one of the toughest periods in the firm’s history.” Their plan for survival is to retrench. They’ll reduce their balance sheet and focus on their “client-facing businesses.”
Significant balance sheet reductions may involve investments the bank has in California’s SunCal Corporation.
The Wall Street Journal devoted significant space to SunCal in its examination last week of the bank’s problems.
SunCal is the largest land developer in the western U.S., according to the WSJ. Here in New Mexico, the company made quite a splash last year by buying the 57,000 acre Atrisco Land Grant on Albuquerque’s west side from the Atrisco heirs for $250 million.
Since the Atrisco acquisition, SunCal has aggressively pursued the creation of tax increment development districts. These districts would funnel future tax revenue to pay off bonds sold to finance infrastructure for the company’s development of the land grant acreage. The company refers to itself as Westland in New Mexico.
The Wall Street Journal report describes Lehman’s activities with SunCal in California as a “bet”:
Lehman bet on the California real-estate market through its financing of SunCal Cos., a closely held developer that buys land, prepares it for houses and sells it to home builders. Flush with cash from Lehman and other Wall Street firms, SunCal acquired thousands of acres stretching from the desert to the Pacific Coast.
The bank had investments to the tune of $2.2 billion in SunCal that have been written down to $1.6 billion, and the WSJ says those write offs could keep happening.
The Wall Street Journal also sheds some light on SunCal Corporation and it’s business practices:
SunCal was founded as a modest real-estate company by Boris Elieff, a Macedonian immigrant who moved to California from Chicago during the 1930s, worked for a local bank and started buying up distressed property.
His sons, Bruce and Stephan, have expanded the business into the largest land developer in the Western U.S., acquiring 250,000-house lots that were valued at $4 billion at the peak.
“We often couldn’t compete with them,” says Robert McLeod, CEO of Newland Communities, a large land developer. “They often outbid us.”
SunCal spokesman David Soyka says: “With the benefit of hindsight, it appears that everyone overpaid at the peak in this unprecedented credit crunch.”
Others were clamoring for a piece of SunCal during the boom period. In late 2005, Lehman syndicated $320 million in loans on several SunCal projects.
The properties include the 2,000-acre McAllister Ranch in Bakersfield, Calif., which was supposed to give rise to 6,000 homes and a professional golf course. Today it is a shimmering expanse of construction debris and dirt, and is in default on some of its debt. By contrast, some of the Lehman-SunCal better-situated properties include 248 acres on the Orange County waterfront and a parcel overlooking a country club adjacent to Beverly Hills.
The Orange County Business Journal last spring provides a more indepth look at the relationship between SunCal and Lehman Brothers, as well as a more detailed look at the problems with SunCal projects.
But, it doesn’t indicate any problems in New Mexico. In fact, the company’s chief operating officer told the Journal at the time that “certain submarkets are holding up better than others.” The SunCal property in New Mexico was not financed by Lehman Brothers and a SunCal publics affairs representative told the Albuquerque Journal last March that the “issues” with some of the companies other developments “have no bearing on Westland” since it’s an entity separate from other SunCal projects.