Wednesday, July 02, 2008

Lehman Brothers and Bakersfield

If you follow Wall Street you know the biggest company in trouble is Lehman Brothers. The stock has plummeted this year due to some bad mortgage bets.


From Fortune Magazine:

NEW YORK (Fortune) -- To understand what went wrong at Lehman Brothers, leave the canyons of Wall Street and head to the flatlands of Bakersfield, 120 miles northeast of Los Angeles.

That's where you'll find McAllister Ranch, envisioned as a 6,000-home, multibillion-dollar recreational community built around a Greg Norman-designed golf course, boating and fishing waters and a beach club. Now McAllister is three-square miles of fenced-off, almost lunar landscape punctuated by a half-finished clubhouse and a golf course gone to weeds.
So far Lehman's bets on McAllister and other real estate plays in Southern California's Inland Empire have cost Lehman at least $350 million.

None of Lehman's investment bank peers have this kind of exposure to the burst real estate bubble. Then there's the exposure all of them have: problems with collateralized loan obligations, leveraged buyouts, and mortgage-related securities. But Lehman insisted it was only minimally exposed to this kind of stuff.

Turns out, it wasn't. As a result, the bank and its shareholders have endured big losses; messy public demotions of the chief operating officer and chief financial officer; battles with short-sellers, who are betting that Lehman's share price, down about 70% on the year, will decline further; rumblings that the firm will be sold; and rumors (which we consider unfounded) that it will pull a financial El Foldo the way the late Bear Stearns did.

36 comments:

chris said...

Lehman is in big trouble. One thing not discussed now, is how the erosion of stock market wealth will add a fresh wave of foreclosures that will have to be written off. Its true many have leveraged in the market to counterbalance declining equity value in there homes. This fresh wave of foreclosures, rising rates, rising oil, car companies going out of business, foreclosures getting worse, declining dollar, the entire stock market will be amongst the worst stock markets in our history. What will this mean for Lehman? Not $31, but $13 if there are lucky to hold at those levels. The unexpected surge in foreclosures due to declining wealth in the market, and global problems such as war, oil, declining dollar, interest rate hikes, inflation, prices up on everything, more institutions are going down, of course GM yes,and we have Lehman, that like GM appeared to fight off financial turmoil that came upon itself. But the unexpected large writedowns,plus Lehmans financial exposure and investment within the stock market itself that has eroded down, along with there stock value will cause a devastation that will make the job of a Lehman worker useless to come to work in time. The business that they are in, is the prime business that will take the largest beating, that will be insurmountable, facing incredible dilutions and debts to overcome. They are saving face by Morgan trying to scratch their back, knowing that a further decline in there stock price will have workers running for the door. The investment banking business is about to get killed much like the stock market. If Lehman knew there stock would go up, or that there would be light soon, they wouldnt need to put more shares out there for there employees. They are desperate dont kid yourself.

StockTalk said...

I think Lehman shares are now at a bottom. It is true that they have all these mortgage related issues, but the firm is actively working to reduce exposure. Stock market is all about speculation so as long as they continue proving others wrong with less than expected losses, they should be able to weather the storm.

Jim in San Marcos said...

I shorted the stock last week. Its a real dog.

I realy don't see anyone buying that stock for future gains

OtherSideofBellCurve said...

Hey BB, just checking in and wanted to give you some field notes.

My wife and I are finally out actively looking to purchase a lot to build our house on next year. We have been calling on lots in Talladega, Legacy, Iron Oak and a few others.

This is basically what we are hearing from these owners. They agree that real estate has come down and agree that it's has further to fall, but when you ask what they want for their lot they think that by some miracle "their lot" has been spared from the downturn! LMAO! It's almost comical. I had one guy tell us that his lot really hasn't come down in price because "it's the nicest one in the development" and advised that we try to buy the adjacent lot for $100,000 less. He thinks the lot next door has come off 30% but not his! On another lot, which was just about priced appropriately, we actually made an offer (for 20% below the asking). They told us that somebody had already put in an offer for substantially more. My question to them was "then why is it still for sale?"

Before we make contact with these people we have already looked to see what they paid and when they paid for their lots. Usually it was the peak amount right at the peak, yet they have only come off maybe 10% if that. It's crazy and, between you and me, I am more than a little frustrated. These lots aren't selling and many of these owners need the money, yet they just can't believe that their lot has lost value.

To the lot owners of Bakersfield: Yes, the downturn in real estate also effects empty lots. I know, I know it just can't be. Only houses can lost value right? Wrong! Wake up people, take my offer now or take even less from us next year. We are willing to lose a little money buying a lot now but if you want to lose it for us by waiting then more power to you.

Fritz said...

You said it there, curve. I myself am getting ready to pack up and head on to browner pastures in the middle of the desert (Las Vegas) for all those reasons. The selection is not only better but infinitely more realistic, not to mention higher wages. Bakersfield, costs more than Las Vegas. BAKERSFIELD!!!
But that's the way. One of the most uneducated, ignorant, and uncultured wastelands on earth. Which wouldn't even exist if not for oil and country music.
Then, after talking to these yokels, you can't help but wish for bad things to befall them.
And don't get me wrong, despite the majority, there are some good people here.

Bakersfield Bubble said...

Thanks guys.

Many of these guys are either bust or going bust...they were living off the commerical work, but now that is slowing down big. I have talked to several city inspectors who told me they are very slow right now. Dont believe the lies from the REIC!

These builders are holding out, this is their last chance to be saved, either sell at a profit and eat OR let it go to foreclosure...

OtherSideofBellCurve said...

Exactly, the builders are the worst offenders. I guess because they have so much tied up in the deal. If they were lucky enough to get out of their specked McMansions they figure they can wait "until it turns around next year" to start selling their 15 lots for what they paid for them.

I talked to the people at Del Sol yesterday. I have to say the guy was very nice and helpful. Now, those lots are 2.5 acres so they are just about the biggest anywhere and should be priced accordingly,which I understand. The guy says that some of the lots they are asking $350,000 and others they are asking $400,000! Basically they haven't come off their peak price AT ALL. Not a dime. So I tell the guy that we have money and are going to be building a large custom house, but his prices are still more than we are willing to pay (by a long shot). He says, yeah it is going to be hard to find buyers in Bakersfield who can afford to buy these lots and build those kind of houses. EXACTLY. We actually could purchase that lot but we won't. What he doesn't understand is that the people in this town who actually can afford to buy a nice lot simply aren't going to at those inflated prices. I am sure they overpaid for that ground significantly and are going to lose a large amount of money.

On another note, we have talked to a number of builders and basically asked them how much on average the sq ft price has come down for building a nice custom house. The responses are varied. The Froehlich,Brian Rice and Sweaney people seem to be realistic and said they could build for quite a bit less than before. But some of the others are giving the same BS. They say materials haven't come down in price so it's about the same or maybe a little less. Materials haven't come down?? Really? So you are saying lumber, drywall and a host of other materials that aren't closely tied to oil haven't come down? BULLSHIT. Also, even if they haven't come down, how come there aren't savings to be had from just the fact that the builder doesn't have to charge 30% on top of the cost. Or, shouldn't there be a massive amount of savings because the subs are willing to take the job and make a normal profit rather than banking a $50,000 profit for doing the drywall?

I guess it is going to take another year or so before the high end lot and custom builder/house market is ready to come to terms with their losses and accept jobs for profit levels that make sense instead of make them rich.

civil-ized said...

Hey Curve,

Just my 2 cents, but if I were you, I would be working the price of the lots down and not worrying so much about the build costs. It obviously should not have gone up much, but it takes just as much lumber and tiles to build a house today as it took 3 years ago. It is the overinflated value of the land the house is sitting on that has gone down. Prices at Home Depot have climbed up and I would like to see the worker willing to take a 40% pay cut just to build someone a McMansion in this economy. If you cheap out on the labor too much, don't expect superior craftmanship.

Of course there is wiggle room in profit for the building contractor to come down, but they have to eat too. I wouldn't expect much of a deal on the contracting side, not even from a friend. The negotiating power is with the lot price.

Look at what Castle & Cooke is doing - they are dropping the prices of Windermere faster than a gringo running for the toilet in TJ. Over 2300 sq. ft. for $349,000 in Seven Oaks. And it sits for over a month. I remember when they were trying to get over $700,000 for that 'hood. $349,00 - and that includes the 'lot'. Nice area if you don't mind having an alley behind your house.

It's the value of the land that fluctuates wildly in a bubble. If my house burned down tomorrow, it would cost just as much to rebuild it today than it would have cost 3 years ago - it is the price of the dirt it is sitting on that was devalued.

It is land that is getting scarcer and scarcer with population growth, not the structure.

Good luck on your custom build. Get yourself a killer deal.

hankmeister said...

I agree with civil. I would add that with the R&B and Dunmore bankruptcies (I expect a few more and bigger.) not all the existing lots are actually in the market right now. When the bankruptcy liquidations come the price will come down even more.
If you believe the ticor newsletters McAllister represents around 3 FULL years of building activity. That combined with City in the Hills and the tracts full of finished lots in the southwest I bet we're looking at a 15 year glut of lots.

OtherSideofBellCurve said...

Hey guys, thanks for your input. I agree with you to a certain extent. I can tell you this though, land value was not the only thing that was inflated during the boom. I agree it was the leading factor, but all building materials were in high demand which led to inflated prices. Also, land value will effect a tract home's price much more than a 5000 sq. ft. custom home. If you look at what those types of homes were selling for at the peak (say $1.5 mill) and what they are selling for now ($900k) then lower lot prices alone are not going to be enough. There were many other factors that contributed to that inflated $1.5 million price point. I would venture a guess to say that in general on building materials alone there will be a 5 to 10% savings as opposed to 3 years ago. Not on steal and concrete, but just about everything else. Also, custom home builders were making a $100-300,000 profit on the large custom homes. Add to that the subcontractors who built in a nice 30% profit margin into their bids and you can see that there certainly is room for savings in materials and contracting. When our contractor goes to bid our house I would expect to see normal bids that will result in a decent profit and wage for the subcontractor. I mean, when you see the guy who owns a small drywall outfit netting half a million in one year I think it's safe to say he is overcharging because of the high demand (I would do the same thing). Everyone involved in the building of a McMansion type home made huge profits because it was hot and good for them.

We go into escrow today on a lot. We bought it for 30% off what lots in that development achieved at the peak (which is only going to save us maybe 10% off the total cost of building the house) and that was a stuggle. We called on many lots in there and most owners were only willing to come off around 15%. If building materials come off 5% and the contractor and subs take 10% less profit (which is pretty much what we are hearing)then we should be fine and they should be fine.

Having said all that, if we started construction tomorrow I believe our house would still be worth less money two years from now than what we will pay. We aren't going to start construction for another year, but we plan on living there for a long time and are willing to have the house be worth less than what we built it for in the short term.

Since we may be one of the few who take the plunge back into building a custom home I will keep you updated if you are interested.

OtherSideofBellCurve said...

Hank,

I agree, but we aren't in the market for those types of lots. We wanted a .5 to 1 acre lot and it had to be north of Stockdale Hwy (I work in the North), which rules out quite a bit including Seven Oaks.

I think it's safe to assume that there won't be any more new developments with those lot sizes in the near future. Though, like you said, there will be a huge number of smaller tract home lots coming to the market soon which will definitely help to drive down the prices of those types of homes. Also, if lot price alone was the only factor then the national builders wouldn't have been posting massive net profits every quarter. They were paying a lot for the ground and then marking it up again and making bank. The subcontractors working on those homes were making good money on volume, but on custom homes it is somewhat different.

Before the bubble you could buy a tract home in Bako for around $70/sq ft (we bought one and still live in it) and you could buy a nice custom home on a large lot for around $125/sq ft. So, by my reasoning, if the tract homes get down to about $115/sq ft (peaked at about $200 sqft) then the custom homes should be able to be built for around $200/ sq ft.(peaked at around $325/ sq ft.). Basically, the builders we spoke to said that without the lot they could build a custom house with all the bells and whistles for around $200/ sq ft. So, they are still off maybe $30/sq ft.

The truth of the matter is, we wanted to build a couple of years ago and held off because of the bubble. We have a couple of children and are out of patience! lol. So, we will try and get the best deal we can while realizing that the market still has some falling to do.

baconman said...

I'm guessing that the next bubble to burst will be oil (gas bubble?). How would you anticipate that hits the Bako area? Big effect or none?

xs10shell said...

From the Californian, 7/23/08:

SALES HISTORY

The Ennis Homes land

Parcel 1: $2.6 million

March 18, 2005 — Ennis buys the 19-acre Stine/Berkshire parcel from Adavco Inc. Adavco, a Bakersfield company whose president is Annette L. Davis, bought the property for $1.6 million through an agreement penned in September 2004 with the Naderi and Aghamohamadi families.

Parcel 2: $5,614,000

May 17, 2005 — Ennis buys the 38-acre Panama/Old River land from the Antongiovanni family.

Together: $1,457,500

June 26, 2008 — Ennis sells both parcels to a Porterville developer, shaving off more than $6.7 million from what the company paid three years earlier.

Dang - I wish I was connected/savvy enough to get that parcel at Panama and Old River.

nddl04 said...

http://www.bakersfield.com/hourly_news/story/506885.html

Interesting "twist" here. Adds an entirely new dimension to the partnership I think.

Perfect Storm said...

When the former Crisp & Cole Real Estate broker first applied to sell California real estate, a prior felony — stemming from Cole’s conduct as an educator — stood in his way.

Cole, now 61, had been convicted of a crime against nature for engaging in oral sex with an 18-year-old man by a Moore County, North Carolina jury In 1988, administrative hearing and criminal court records show.

Dang!

civil-ized said...

Don't you wish Californian staff writers could put together a sentence that made sense the first time you read it?

Almost as bad as the traffic girl on the radio urging everyone to "use cautious" when driving. LOL

Bakersfield Bubble said...

The Carl Cole story was a SHOCKER to me. WOW!

I wonder if he sucked anyone in towns dick? What a sick person!

xs10shell said...

(Land)Lords of Bakersfield?

hankmeister said...

The shoes are dropping! wow. I was amazed at the bath KB took on the project at Comanche & 178. $2.5 Million loss if what the paper reported is close to correct.
It makes a person wonder how many of these tracts are actually going to be built out.

hankmeister said...

There's enough material coming to light for a novel/documentary in this somewhere.

xs10shell said...

I always loved this article at http://www.loremagazine.com/go/article_free.php?mp_id=94

Here are some excerpts but please go to the full article to make sure that everything is understood in context intended by author Alan Katz:

An Unlikely May-December Partnership Sets Bakersfield Real Estate Scene Ablaze

“We’ve definitely got people talking,” Cole says. Not only talking, but watching, too.

Some of the company’s biggest deals are consummated late at night.

“I couldn’t believe the brass on this boy.

Testosterone, hunger, aggression and flash – this boy had ’em all in abundance. Cole was both amused and aghast.

Cole had found his calling late in life. Burned out after a long career in education, he morphed into the top-grossing agent at Kyle Carter. Upon joining the company, Crisp latched onto Cole. A complicated relationship developed – competitive, friendly, Oedipal.

“Let’s get it on, son.”

Crisp dished up tart comments about Cole’s style of dress: “Stop looking like a high school principal.”

The partners feed, wolf-like, on each other’s energy,

And their chemistry extends to their personal lives. This year they’re moving into adjacent homes on a golf course.

“A young man has dreams and aspirations, and what he needs is someone to believe in him. I believed in him, and it has all come back to me tenfold. David helped me fly.”

xs10shell said...

BB: - you should take down the Ca Central Coast link. They're closed. Apparently they got some kind of legal demand or subpoena regarding isp info on people posting on the blog site.

Dirty Sanchiz said...

If the feds to their job, Cole will be in his own personal gay disneyland. Inmate gay sex - the happiest place on Earth for Carl "Hot Karl" Cole.


"One night it was getting late, he was buttraped by a large inmate."

Lone Ranger said...

"The Carl Cole story was a SHOCKER to me. WOW!

I wonder if he sucked anyone in towns dick?"


Isn't that what salesmen do in one form or another?


Not all that surprising. Lot’s of perv’s are employed in education..that’s where the fresh meat is concentrated.

Reminds me of Denny Hastert, our old Speaker of the House. Worked as a High School wrestling coach until he got too “friendly” with his young male students.

A lack of morals and ethics has proven to be no obstacle to obtaining an RE Brokers license. Great bunch of folks.

If our local sorry excuse for a newspaper had any real journalists on staff, the perversions of Carl Cole would have come to light years ago. Crime convictions are public information.

Oh wait, I forgot..... ad revenue comes first. Once the checks bounce, the bad news comes forward.

OtherSideofBellCurve said...

Hey Bakersfield Bubble I have a question for you.

Here we are right in the middle of everything we knew was going to happen as long as three years ago. Housing value in Bakersfield is dropping like a rock, yet you aren't posting anymore. What gives? What we predicted is happening now. We are right in the middle of it. Almost every day something new is reported on that is relevant to Bakersfield.

So, my question to you is: Have you lost interest because you in fact have purchased a house?? Say it isn't so BB.

Bakersfield Bubble said...

The local media has been all over the story and I sometimes feel like I am simply copying and pasting their information.

I enjoyed it much more when we (all of the regulars here) were breaking the news. Also, several of my sources at different companies have been laid off or moved on to other industries, so I dont get as many details as I did before.

I purchased my home in 1994, so I still have a few dollars of equity left - at the current rate I will be underwater in a year :) - I never considered my home an "investment", I think of it as a place to live.

I thought that by early 2009 there would be some good deals, I still believe that... so yes, I think we are close to the time when someone can buy and not be a homedebtor, but a homeowner and enjoy a place to live with their family. As soon as we clear out this massive REO inventory we will be near a bottom.

Best to all

btw - I am a regular at some of other national financial blogs.

OtherSideofBellCurve said...

I can understand that. I guess it is much more interesting for you to link original stories rather than rehashing whatever the Californian is printing.

I agree that we are close to a price point where a house buyer can feel comfortable pruchasing, as long as they get a deal. In the high end market things are still out of control. You will see an occasional high end home listed for a decent price, but usually that house has something wrong with it. The really nice ones are holding firm and not selling. Brian Rice just sold one of his spec houses on Greatest Place in Tallageda. It was around 4,000 sq. ft. on a little more than half an acre. Apparently it sold for approximately $860,000 but that price includes Rice building a small shop in the back. Still, that's way too much money per sq. ft. in my opinion.

So are we to believe that the tract houses in Bako are going for $110/sq ft and falling like a rock, but the high end houses are still going to fetch $200/ sq ft?

We bought a lot and got a good deal on it as far as we are concerned. I have no doubt it will be worth less in a year or two, but we aren't looking at it as an investment. Now building the house is another matter altogether. Looks like we may have to wait another year before you can build a house in Bako for what they are selling for now. I can't imagine what will need to transpire so you can build a house for what it actually should be priced at. I mean if builders think that $200/ sq ft is a good deal and only a few believe that, then it's going to rock their and the sub-contractors worlds when they realize that somehow they need to find a way to build one (with the same quality and high end components) for $150/ sq ft. Those numbers don't include the lot price.

xs10shell said...

I just looked at property in the $125,000 range, mostly between Sine and 99, just north of White Lane. Mostly REO or abandoned. Can't believe the wasteland out there. I saw an entire cul-de-sac abandoned with one lonely occupant living smack in the middle.

Perfect Storm said...

How much oil does Kern have left? I am taking just a quick shot at this, but I am guessing at current production seven years.

South Belridge Oil Field - reserves520 million barrels in 2006, annual production 35.5 million barrels a year so in ten years oil reserves will get small

Mount Poso Oil Field - small potatoes

Midway-Sunset Oil Field - reserves 580 million barrels in 2006 annual production a 39.7 million barrels a year so in ten years oil reserves will get small.

McKittrick Oil Field - small potatoes

Lost Hills Oil Field - reserves 110million barrels in 2006 annual production 11.9 million barrels a years so in ten years oil reserves will get small.

Kern River Oil Field - reserves 476million barrels in 2006 annual production 31.2 million barrels a years so in ten years oil reserves will get small.

Kern Front Oil Field - small potatoes

Fruitvale Oil Field - small potatoes

Elk Hills Oil Field - reserves 107million barrels in 2006 annual production 17.2 million barrels a years so in four years oil reserves will get small.

Cymric Oil Field - reserves 119million barrels in 2006 annual production 18.4 million barrels a years so in four years oil reserves will get small.

Buena Vista Oil Field - exhausted

So that puts Kern final production of oil and when the lights go off by this crude analysis around 2015, but with next three years being really good.

I would not buy investment property in Kern County.

Perfect Storm said...

Oh but with all the oil fields being exhausted they can build houses and have a a real estate economy based on a new economic model, where have I heard that before????? Hmmm

Realestateslasher said...

Ok ! where is Broker Jack
when this all going down

hankmeister said...

From what I can see it looks like the 'rental/first time home buyer' neighborhoods are the ones getting hammered the hardest by the REOs.
I don't care what anybody says a 2/1 built in 1925 in Oildale can't be worth 150k let alone 200k under any circumstances. I also suspect that what we are seeing is:
1)the wreckage after investors realized they could never make the rents cover the inflated mortgages and walked. and
2) First time home buyers whose 1 or 3 year ARMs ratcheted the first time.
I'd venture a guess there are around 1000-2000 built homes above what demand calls for right now. and there are tons of vacant lots out there still. This is going to be a long haul to get out of this.

Bakonewbie said...

Anyone know of a site or blog that has more action? I have only been in Bako for about 9 months and I am dying to buy a house. I have not rented for this long since I was young and single. It sucks!
Seems like some banks are starting to move, Olive Park at $350k, Brighton Estates for $375k. Looks like some decent prices are on the horizon.
Anyone in "the know" have any info to share? Prices, deals, etc.
Anyone know any GOOD realtors? Anyone have any luck at the trustee auctions? (seems to me everything has dropped so much that even first bid price is way too high)

OtherSideofBellCurve said...

Hey Newbie,

Sounds like you are looking for a mid-level custom home? Brighton and Olive Park are right in that range. I think you are right and they are definitely deals to be had in those areas. Some of the nicer houses in Brighton are still delusional. There are a couple for sale in there by Mary Christenson and they are way overpriced. I recommend staying away from any property listed by her as she doesn't seem to get it.

If you are looking to work with a frim than I recommend Scott Rivera. He usually prices homes correctly. That being said, he still has overpriced listings, but you may be able to find a deal.

My strategy has been to not work with an agent at all. Who needs them with all the information we have on the interenet these days. I browse the MLS and when I find a nice property I get the background info, previous sales price, is it in default?etc. Then I calculate the sq ft and decide weather or not it is close to reasonable. So far the only ones that are reasonable are ugly, lol.

Good luck with your search. The longer you wait the better deal you are going to get. The market still needs to go down in the mid and high level custom houses.

hankmeister said...

Newbie it depends what you are looking for.
As a rule you get more house for less money on the east side of town but the API scores for BCSD schools tend to be pretty bad. The far eastern schools being an exception.
I am still of the opinion we are not at the bottom of this market yet.

Chus said...

This is what I think: Lehman Brothers Bankruptcy