Most of the debate over the subprime lending mess has focused on homeownership and foreclosure. Yet, the real estate bust is providing some hard-knock accountability as Fortune magazine recently highlighted.
In an article posted earlier this month, appropriately title "Reckoningn for a real estate mogul," reporters outline the career of NYC developer Harry Macklowe.
In February 2007 the developer bought seven Manhattan skyscrapers for $6.8 billion from the Blackstone Group. It was the peak of the market. There was plenty of easy money available. Macklowe put up only $50 million of his own cash, financing the rest of the acquisition with $7 billion in loans, due in February, from Deutsche Bank and Fortress Investments, a publicly traded hedge fund. That's a huge amount of short-term, high-risk debt. Once the subprime crisis unfolded, Macklowe couldn't refinance. Now he is handing the keys to those buildings back to Deutsche Bank and other lenders to which the bank has sold some of the debt. He is also trying to sell his precious General Motors Building to repay a $1.2 billion bridge loan that is controlled by Fortress.
The article is a good read about the highs and lows of one of New York's most industrious and ambitious real estate entrepreneurs as well as an insightful examination of how the commerical real estate industry works in the real world.
Subprime lending serves an important and valuable purpose in a dynamic market. It also comes with risks. Those playing in the subprime sand box know the potential for boom and bust, and its not for the light hearted.