March 17, 2008
The enigma of the Bear Stearns building in Manhattan
Does Bear Stearns own 383 Madison Avenue, the Manhattan building from which it operates? This question is, as John Carney and Choire Sicha point out, oddly difficult to answer.
But the answer determines whether Bear was sold for a song or actually paid JP Morgan Chase to take it over.
Bear’s building is worth at least $1.2bn and probably quite a bit more. So, if Bear owns it, then the bank it effect gave JP Morgan a net $1bn to take on its balance sheet (or some of it, since the Federal Reserve lent a helping hand).
On the other hand, if Bear does not own it, then it received $230m, valuing itself at a princely 2.5 per cent of book value. That is not a lot, but it is at least something.
JP Morgan insisted during its Sunday night conference call that Bear owns the building, but there is some confusing talk about a synthetic lease and the building being an off balance sheet asset. Still, the consensus seems to be that, if anyone owns 383 Madison, Bear does.
So what looks like a derisory price for Bear’s business is actually a negative one.
Update: Justin Fox concludes from this that the Fed handed Bear to JP Morgan on a plate.
After Enron, you would have thought that financial commentators would have had a better appreciation of how synthetic leases work. The scam works like this:
Instead of buying the building off the developer (or previous owner), the company arranges for it to be bought by a lessor (I wouldn’t use the term landlord because this is a purely financial arrangement).
BS leases the buildiing from the lessor for a rent equal to the lessor’s interest cost plus margin, and on expiry of the lease has the right to buy the building at the original cost. Alternatively BS can renew the lease, failing which the lessor can remarket the building and if the amount received for the sale is less than the lessor’s investment, BS has to make up the shortfall, upto a maximum guaranteed residual value. This amount will typically be less than the lessor’s investment and is calculated so that the present value of the lessee’s payments is less than 90% of the building’s value at the inception of the lease - so that the lease is off balance sheet for the lessee for accounting purpose, even though the existence of the purchase option means that the lessee is treated as owning the building for US tax purposes.
All we know about the value of the building is that the maximum guarantee is $570 million (from the latest 10-k), which is effectively a liability of Bear Sterns, although they also own a building with a presumed higher value.
Posted by: Mark Williams | March 17th, 2008 at 4:06 pm | Report this commentThis article has only added to my confusion. The building value is the least of the subsidies, since the Fed guaranteed up to 30 billion to cover BS illiquid assets. The way I interpret the sale is JP Morgan paid 236 million for the rights to any future liquidity (i.e. value) in Bear Stearns portfolio and the Fed threw in a $30 billion put (to offset liabilities, one assumes).
Thanks Mark for noodling the synthetic lease. It sounds as though the maximum value of the building would be 750 million to JP Morgan, but that assumes real estate values won’t fall –an optimistic assumption given the banks’ revenues are dropping like stones through ice.
Posted by: Bart | March 18th, 2008 at 5:08 am | Report this comment