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Data Centers Crucial To Lehman Sale
miller60 writes "What assets retain value in the midst of a financial panic? Data centers. When assets of bankrupt Lehman Brothers were sold to Barclays Tuesday for $1.75 billion, Lehman's data centers and headquarters accounted for $1.5 billion of the value in the deal. That echoes the JPMorgan-Bear Stearns fire sale, in which Bear's two data centers and HQ represented much of the sale price. Amidst financial turmoil, Wall Street's high-tech data centers become the crown jewels for buyers of distressed assets."
Almost! It's actually about the location of the data center, i.e, close to the exchange. A fast, low latency connection to the exchange gives you a crucial edge over the competition. It means when things change you can get your trades in before your competition does. This is ever more important in the up-and-coming automated trading systems.
I am an investment banker and can say with confidence that the datacenters were an afterthought in this deal. Important? Certainly. The most important? a joke. Bob Diamond and Barclays have wanted to extend its US investment banking business for several years, and found an opportunity to grab one at a fire sale. But the true value of the deal is enormously larger than listed, as it involves taking on assets estimated (with confidence, I'm sure)at $72 billion and liabilities of $68 billion. I'd recommend reading http://www.ft.com/cms/s/0/5c9dcc26-83f1-11dd-bf00-000077b07658.html?nclick_check=1 to inform yourselves about the transaction.
As to the Bear Stearns datacenters comprising the bulk of the value - that is about as wrong as you can get. The breakup fee (the fee paid to JP Morgan if the deal did not go through) was the building. JPM could have walked from the deal and gotten the builing, so to argue that the deal was for the building/datacenter is absurd. Let's not forget that the Federal Reserve alone lent $29 billion for the transaction. Datacenters are valuable, but not worth that amount of money.
The trouble is that this has NOT been happening as long as mortgages have been around.
Anyone that knows anything about econ knows at the core Economics is about incentives.
In the last 10-15 years inventives in real estate have been flipped backwards.
Let's just take a few examples:
#1 The rise of a secondary market for mortgages.
There was a time when most mortgages were self-funded. The bank would fund the mortgage out of its own pocket. If they were sold, it was to FNMA.
Banks had a real incentive to do solid deals on homes with proven valuations.
In the late 90s the secondary market exploded. Somebody figured how to sell just portions of a mortgage by combining it with portions of other mortgages into a MBS (Mortgage Backed Security) and these securities were sold as ROCK SOLID CREDIT opportunites. The reason?
#2 The derivatives market and other developments
The derivatives market is valued at an est. 6tn. Bigger than stocks. Bigger than bonds. This and other developments, like the consolidation of the IBank industry led to real issues with the 3 credit rating agencies. There began to be financial incentives to give good, AA and AAA ratings to securities.
So these MBS's were given, yes, A, AA and even AAA ratings. You have to understand that AAA means "rock solid investment." That is, a AAA credit rating is considered to be as good as a t-bill.
#3 Brokers
Since banks sold mortgages to the secondary market, all of a sudden you didn't NEED $200k for 15 years to lend somebody $200k. All you needed is $200k for 180 days. This led to the rise of mortgage brokers. With far less scrutiny than banks, it was easier to fudge numbers to get deals made.
This led to an array of CRAZY financial instruments designed basically just to make a profit for the lender.
Take the infamous NINJA loan: No Income, No Job, No Assets. That is, you're given a mortgage based on nothing but good looks and your credit score. Nothing else is verified.
Or the interest-only loan with a balloon payment.
Or ARMs.
Technology played a part, too. A small role, but still, being able to access a HELC via a debit card makes that TV purchase or riding lawnmower or whatever a lot more tempting.
All of these things casue real issues with inventives.
Who is the appraiser working for? Well, he's hired by the loan officer. Who is the loan officer working for? Well, he's not lending his bosses money anymore, since the mortgage will be sold in 90 days after close anyway. Who is the agent working for?
This has NOT been business as usual. Make no mistake about that.
-Any taken-advantage-of borrower requires an even-more-taken-advantage-of lender. The borrower gets to walk away, at least having a gained some time in a home they shouldn't have moved into, while the lender suffers a huge loss. (Of course what actually happened here was the immediate lender, a broker, pocketed a huge gain and dumped it on other investors.)
I love how you gloss over this statement in parenthesis as if it's a minor point. The situation that occurred is that predatory lenders issued ARM mortgages to people that they knew would be unable to pay for them. Keep in mind, the issuing bank has a full financial report of the borrower's income, debts, and credit history. These bankers then offered deals such as "you can have a fixed rate mortgage, but you'll need a $10k down payment, but if you get an ARM, we can do it without a down payment!" I live in Tennessee, and by and far this state is not as hard hit as some others. One of the reasons is that we have protective lending laws. In this state, you cannot get a mortgage without a 10% (IIRC) down payment. That may seem unfair to those who cannot afford the down payment, but it's for their own good; if they can't afford the 10% down, odds are they cannot afford the mortgage, and a bank should be prevented from signing them into a contract they cannot afford to pay off.
From what I understand, it all comes down to everyone believing that real-estate value wouldn't stop rising.
That's a pretty good summation for parts of the country (e.g. the Washington D.C. area, probably areas like California too). Essentially, in W.D.C, people said "Well, the gov't is here, and so jobs are guaranteed. So housing will always go up." The problem is when it goes beyond where the base market can buy.
There's also another issue though - there were a lot of banks, etc. that issued bad mortgages outright. For example - the high school graduate students that moved into my parent's neighborhood - no jobs, but they got a mortgage, and eventually ended up in foreclosure. Of course, the city of Columbus, OH had some issues too politically as they tried to "clean up" downtown by moving the "poor" out into new housing (helping to get the qualified for loans they shouldn't have had) elsewhere in the state - e.g. by my parents, and other places in the Greater Columbus, OH area. For them, the politics work out good - their constituents are happy, and those people are now "someone else's problem" (literally), so it is hard to hold them accountable (their district was improved while someone else's was deteriorated).
Another good example - my wife and I were looking at buying a house in 2006. In getting pre-qualified, we looked at Washington Mutual and several others. Because we did not have a large-enough down-payment available (we had closing costs) at that time, WaMu was going to give us a double loan so we didn't have to have PMI (mortgage insurance). The first loan would be the mortgage itself, and the second was to become the down payment. We didn't really like it; but they were going to let us do that. We ended up not buying that year, and have since moved and bought a house through BB&T, with a better loan - only one loan too.
All-in-all, it was not just one issue that caused the problem.
Truth is like the sun. You can shut it out for a time, but it ain't goin' away. - Elvis Presley (source: imdb.com)
The trouble is that this has NOT been happening as long as mortgages have been around.
Anyone that knows anything about econ knows at the core Economics is about incentives.
In the last 10-15 years inventives in real estate have been flipped backwards.
In the late 90s the secondary market exploded. Somebody figured how to sell just portions of a mortgage by combining it with portions of other mortgages into a MBS (Mortgage Backed Security) and these securities were sold as ROCK SOLID CREDIT opportunites. The reason?
That somebody was Alan Greenspan. When he took over as Fed Chairman, one of his goals was to shrink the financial sector to just a few banks to better compete with Europe. In 1933, the US passed the Glass-Steagall act; which made it illegal for Lenders (Banks) and Underwriters (Brokers) to be under one roof. This law was further tightened in 1956 to exclude ownership of out of state banks.
Fast forward to 1996. The Federal Reserve, under the leadership of Alan Greenspan (a former head of JP Morgan) decides to allow banks to have 25% of their business in Underwriting (brokerage). This decision effectively nullified Glass-Steagall. Then, in 1999, the Gramm-Leach-Bliley act repealed part of Glass-Steagall and opened the door for Banks to compete with Insurance and Security companies. This law was signed by then-president Bill Clinton. While it was created by two Republicans; it had bi-partisan support in an attempt to 'modernize' financial services.
#3 Brokers Since banks sold mortgages to the secondary market, all of a sudden you didn't NEED $200k for 15 years to lend somebody $200k. All you needed is $200k for 180 days. This led to the rise of mortgage brokers. With far less scrutiny than banks, it was easier to fudge numbers to get deals made.
This led to an array of CRAZY financial instruments designed basically just to make a profit for the lender.
This monster is precisely what the GLBA created. And this monster is precisely why the Tech Bubble and then the Housing Bubble occurred. It will be a decade, at least, before we have completely recovered. The Bush Administration is not at fault for creating the mess, but neither they nor Congress did anything to fix it early on--despite numerous warnings from economists across the country.
In America today you can murder land for private profit. You can leave the corpse for all to see, and nobody calls the c
What a lot of people don't understand is that this is occurring in other nations too. I'm sure any Slashdotters from the UK can chime in on the Northern Rock bailout and the condition of their real estate market.
the good ground has been paved over by suicidal maniacs
An amusing footnote to illustrate how powerful the proto-financial-services people were in U.S. politics:
Citigroup nee Citibank merged with Travelers a year before GLBA using a temporary exemption from Glass-Steagall.
Smith-Barney, Travelers, Shearson and Primerica merged in 1994, five years before GLBA, using a similar waiver from Glass-Steagall compliance.
http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act