Thursday, August 5, 2010

Geithner & Summers: Real Estate Secrets

Prior to joining the Obama administration, Tim Geithner ran the New York Fed and Larry Summers had a stint at Harvard. Both invested heavily in real estate. The NY Fed's investments came via an imploding Bear Sterns, while Harvard Management Company's real estate was part of a diversified investment portfolio. Both organizations lost big on real estate in 20009.

WSJ reported on the NY Fed's struggles:

The portfolio's residential and commercial loans were worth about $5 billion recently, compared with $9.6 billion in March 2008, when Bear Stearns collapsed.

The New York Fed's holdings of commercial-real-estate debt lost 35% of their value over the two years ended March 2010, while a pool of residential loans fell about 60%, according to New York Fed documents and people familiar with the matter.

The Harvard Crimson detailed HMC's difficulties:

HMC reported a 50 percent loss on its real estate holdings in fiscal year 2009. In fiscal year 2009, HMC’s investments in “real assets”—a category that includes both real estate and commodities—fell by some $2.4 billion to $5.6 billion.
What strategies are the NY Fed and HMC considering? HMC may sell their real estate portfolio to China Investment Corporation, a sovereign wealth fund. The NY Fed is pondering foreclosing on nonperforming loans. That's two steps deeper into the rabbit hole. But there are more.

A third comes when one considers the NY Fed purchased 1,600 credit default swaps from Bear. The fourth step is a leap, given BlackRock's 2009 management fee is more than all principal payments on the $30 billion loan. Earlier this year BlackRock defaulted on $3 billion in loans on Stuyvestant Town, transferring responsibility to Uncle Sam. Tim Geithner covered BlackRock's backside before Congress.

The fifth step came when the NY Fed wrote down $744 million in loans to Extended Stay Hotels, Inc. Stephen Schwarzman's Blackstone Group was one beneficiary of Uncle Sam's debt cramdown on Extended Stay.

Harvard may sell to a sovereign wealth fund (SWF), while the NY Fed benefits private equity underwriters (PEU's). Guess which two groups got free passes under financial regulatory reform? SWF's & PEU's. How far is the free fall?