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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
one-fourth of commercial real estate mortgages were securitized in , securitizers
issued billion of commercial mortgage CDOs, a number that again dropped pre-
cipitously in .
Leveraged loans and the commercial real estate sector came together on July ,
, when the Blackstone Group announced its plan to buy Hilton—a hotel chain
with , properties—for billion, a premium over the share price. A year
later, one author described this deal as “the apogee of the early-millennial megabuy-
out frenzy, where cheap and readily available credit, coupled with a relentless one-up-
manship, spurred private equity firms to buy out companies at often absurd
overvaluations, saddle them with massive debt, and then pay themselves hefty fees
for the trouble.” Twenty billion dollars in financing came from the top five invest-
ment banks and large commercial banks such as Bank of America and Deutsche
Bank.
Bear Stearns was increasingly active in these markets. While Bear topped the
market in residential securitizations, it ranked in the bottom half in commercial se-
curitizations. But it was racing to catch up, and in a presentation boasted: “In
, we firmly established Bear Stearns as a global presence in commercial real es-
tate finance.” The firm’s commercial real estate mortgage originations more than dou-
bled between and .
And then the market came crashing to a halt. Although the commercial real estate
mortgage market was much smaller than the residential real estate market—in ,
commercial real estate debt was less than trillion, compared to trillion for res-
idential mortgages —it declined even more steeply. From its peak, commercial real
estate fell roughly in value, and prices have remained close to their lows. Losses
on commercial real estate would be an issue across Wall Street, particularly for
Lehman and Bear. And potentially for the taxpayer. When the Federal Reserve would
assume billion of Bear’s illiquid assets in , that would include roughly bil-
lion in loans from the unsold portion of the Hilton financing package. And the
commercial real estate market would continue to decline long after the housing mar-
ket had begun to stabilize.
LEHMAN: FROM “MOVING” TO “STORAGE”
Even as the market was nearing its peak, Lehman took on more risk.
On October , , when commercial real estate already made up . of its as-
sets, Lehman Brothers acquired a major stake in Archstone Smith, a publicly traded
real estate investment trust, for . billion. Archstone owned more than ,
apartments, including units still under construction, in over communities in the
United States. It was the bank’s largest commercial real estate investment.
Lehman initially projected that Archstone would generate more than . billion
in profits over years—projections based on optimistic assumptions, given the state
of the market at that point. Both Lehman and Archstone were highly leveraged:
Archstone had little cushion if its rent receipts should go down, and Lehman had lit-
tle cushion if investments such as Archstone should lose value. Although the firm
