Of Moths and Flames
We are slowly but surely getting hooked on the Netflix series Dirty Money. I’m sure that we are way behind and everyone has already watched these great Dateline-like shows. Tonight we watched both the show about the Goldman Sachs Malaysian scandal that brought down Lloyd Blankfein and remains an embarrassment to David Soloman and the one about the Kushner Company’s history of being a controversial landlord in the Northeast. I found the GS Malaysia story interesting, but I was somewhat detached because it all happened well after I was long gone from the Wall Street game. But the Jared Kushner story is one that feels much closer to my personal experience and therefore was all the more interesting.
The story on Dirty Money about Jared is called Slumlord Millionaire. During my forty-four years on Wall Street, I spent two years (literally two years to the day) running a distressed company that owned twenty-two trophy commercial properties. They had all been overpaid for at the peak of the market in 2006-2008 and were, naturally, over-leveraged at that peak. By my early estimates, at least seven of the twenty-two properties would be going into foreclosure in the next few months. I was hired to find a way to salvage the company and keep it out of bankruptcy. That would require me to restructure almost all twenty-two of those properties since the $2 billion of loans that financed those properties were weighing very heavily on the company. And here’s the funniest part of this story, I had never restructured a commercial real estate deal in my life. In fact, I had never worked in commercial real estate financing at all, so this was all new to me.
I had worked to restructure and creatively recoup a $4 billion portfolio of bad sovereign loans to Latin America and other Emerging Markets. What that had taught me was that if the distress was great enough (which it clearly was in commercial real estate in 2008-2010), there was room to maneuver. So I started to maneuver and try to find ways to keep the company afloat. I needed a very quick course in real estate restructuring.
I asked friends and was introduced to a guy by the name of Rob Verrone, who had been at Lehman in their real estate department and was purported to be a restructuring guru who, thanks to the collapse of Lehman, was suddenly available to assist us. I thought of him tonight because he was interviewed and was part of the expose on Jared Kushner’s real estate business. When I saw him I told Kim he looked familiar. I had to rewind the Netflix to see his name, but then immediately remembered our meeting. He read me the standard restructuring playbook, which struck me as perfectly sensible in normal distressed times, but largely useless to our deep distress situation. Our brand of distress and brand of trophy properties required much more “creativity” to keep these properties out of the tank. And did I mention I had very little in resources to work with, meaning there was not a honeypot of money available to grease the skids on these deals. I had to more or less self-finance these restructurings, which would be a real trick.
The Dirty Money story is a harsh depiction of how the Kushner Company made its money from being a slumlord in the most challenging areas of New York and Baltimore. It tells the story of nasty landlord/tenant dealings that preyed upon economically low-income people to charge them extra fees and penalties for late payments, leaving them to struggle with slum-like housing. This was something I saw plenty of in my short two years running a development company. We owned a few rental buildings, but luckily they were more high-end and we were mostly trying to sell condos rather than rent apartments. I had my share of difficult condo sponsorship meeting with disgruntled owners, but we always had lots of incentives to keep those situations mollified since to not do so could easily lead to an action by the NY Attorney General’s office to shut us down as a developer who could sell condos and that would not be good for us. Mostly I was dealing with upper-middle-class owners and not low-income tenants. But I was surrounded by real estate developers like Jared and Ivanka and Trump and I’m not sure that will ever completely wash off of me.
In fact it was that time when I had my encounters with those three notables. In my first year on the job, and Jared Kushner’s New York Observer published its list of the Power 100 in New York Real Estate. Unbeknownst to me at the time, I had been put on the list at #67. I found this hilarious because I was so new to real estate. It goes to show you that if you sit on a pile of assets, even crappy assets that are over-leveraged and mostly on the edge of foreclosure, you are deemed by some to have power. This reality taught me a lot about both the Trump family and the Kushner family. It was this time when I met with Ivanka in her office at Trump Tower to discuss putting the Trump branding on one of our buildings as part of our “creative” efforts to make something change in those property circumstances. I was actually impressed by Ivanka’s smarts. When I met Jared at the party for the Power 100, he was exactly as portrayed on this documentary, cold and calculating and realizing that I was much less important than others in the power-filled room, not worthy of more than a quick handshake.
I will say for the record that when I left the job after two years (having successfully restructured and kept control of all of the properties), Jared ended up buying the biggest and most challenging one of the properties to restructure (I tore up $400 million of debt in the restructuring and got kudos from all the legal and restructuring pros for the magic of the deal) and is its owner to this day. My guess is that it has worked a lot better for him and Kushner Company than his ill-fated purchase of 666 Fifth Avenue, that devilishly-high-priced ($1.8 billion) property that he managed to overpay for at the peak in order to get our of the slumlord business in favor of getting into the influence-peddling business with his father-in-law.
It was also during those days when I got to meet Donald Trump a few times (he rememberers me like he remembered Lev and Igor) and even Donald Jr. and Eric at an insurance broker dinner. I am always amazed, upon reflection, at how close this little moth has flown around these flaming luminaries.