I-Banks: Who lost the most?

A roundup of real estate write-downs among the big firms

From left: Brian Moynihan of Bank of America, John Stumpf of Wells Fargo, Jamie Dimon of JPMorgan Chase, James Gorman of Morgan Stanley, Vikram Pandit of Citigroup, Lloyd Blankfein of Goldman Sachs

Since Lehman Brothers fell two years ago this month, there have been volumes of news reports about the losses that all of the big investment banks have endured on real estate deals.

But who lost the most?

This month, The Real Deal looked at just how much money the biggest surviving banks lost on bad real estate bets. Not surprisingly, losses mounted from 2008 to 2009, as the downturn accelerated.

Indeed, Bank of America, Morgan Stanley, JPMorgan Chase, and Citigroup — the four U.S. banks whose losses are easiest to measure because they report to the Federal Deposit Insurance Corporation — saw aggregated real estate write-offs skyrocket from about $17 billion in 2008 to about $40 billion in 2009.

The bulk of those loans (about 80 percent in many cases) were for one- to four-family homes, which were being foreclosed on at record rates.

The market for distressed real estate assets has slowly improved, which bodes well for banks that opted to hold on to their loans rather than write them down. But real estate losses continue to weigh on the books, and those same four banks seem on track to come close to last year’s total losses in 2010.

“Things are not improving for these guys,” said Georgette Prigal, president of the Pheulpin Capital Group, a Long Island-based private investment firm. “Two years later, the residual effects of aggressive credit extensions continue to place downward pressure on balance sheets.”

Of course, any losses should be compared to the banks’ total assets. Bank of America has suffered the most blows, with $26.7 billion in real estate charge-offs since the problems hit, even if its total assets at the start of this year were $650 billion.

Wells Fargo, which was also heavily exposed to home loans, was a distant second place, and JPMorgan and Citigroup, which had slightly more diversified portfolios, came in third and fourth, respectively.

Goldman Sachs and Morgan Stanley also underwrote many real estate loans, but they’re regulated by the Federal Reserve, which has a more opaque reporting system that doesn’t break out their real estate numbers as clearly. And neither of them have retail banks that do direct home loans, so they were spared on that front.

To arrive at the figures, The Real Deal took the banks’ declared write-offs from the end of 2008 through the first quarter of 2010, using data compiled by the FDIC and in annual reports, and added the recent losses declared by the banks in the second-quarter reports.

The result is a grim picture of how the big banks have been stung.


Bank of America Corp.: $26.7 billion in real estate losses


Bank of America bought two companies heavily exposed to the subprime mortgage market: Countrywide Financial and Merrill Lynch. The losses stemming from those two firms were a large part of BofA’s 2008 real estate write-downs, which constituted about a third of its overall company losses.

One Bryant Park
In 2008, it wrote down $5.5 billion in real estate loans, while in 2009, that spiked to $13.8 billion. And so far this year, the bank has written down another $7.4 billion in real estate loans.

As with many banking institutions The Real Deal looked at, a major drag on the books for the bank was that of one- to four-family residential properties. In addition, BofA’s own new headquarters, One Bryant Park, has been an expensive proposition, with a $2 billion price tag. (Even though bank officials this summer began to shop around $1.3 billion in mortgage-backed securities to help pay for it, the market for those types of bonds has been weak.)

Still, bank officials point out that the high-rise, which is almost fully leased, generates about $125 million in annual operating income from tenants that include: a law firm, a theater and the Durst Organization, its developer.

Jerry Dubrowski, a spokesperson for BofA, said the bank’s losses must be put in perspective.

“Our loan book is large,” he said. “And the accounting rules changed this year, so we had to suddenly put most of our home equity loans on our balance sheets.”


Wells Fargo: $19.4 billion in real estate losses


Last year, Wells Fargo bought Wachovia, which was heavily exposed to the subprime mortgage market because it had bought Golden West Financial, a California lender, in 2006.

As a result, in 2009, Wells Fargo had real estate loan write-downs of $9 billion — far more than the $2.7 billionWells Fargo’s New York headquarters at 375 Park Avenue it had written down the year before in 2008.Those are no small figures, even if its total assets are $1.2 trillion, according to 2009 end-of-year figures. Yet this year it seems to be on track for even bigger losses, with $7.7 billion already charged off between January and June, according to FDIC and bank figures.

However, officials at the bank, whose overall second-quarter profits were up 12 percent, point out that it’s ramping up its mortgage-writing business. Wells Fargo’s mortgage application pipeline was up 15 percent at the end of June from the first quarter, Mary Eshet, a company spokesperson, said in an e-mail.

Still, Jeffrey Rogers, the president of Integra Realty Sources of Manhattan, an appraiser, cautioned against assuming that any bank is in good shape just because it may be profitable now or because the amount of its write-downs is declining. Rogers said more colossal loans are coming due. “This is only a fraction of all the debt coming due, like a trillion and a half in the next three years,” he said.


JPMorgan Chase: $16.9 billion in real estate losses


With the help of the federal government, JPMorgan Chase acquired investment bank Bear Stearns as it was on the brink of collapse. That in turn contributed to its write-down of a hefty $4 billion in 2008, with $3.9 billion of that loans backed by one- to four-family homes. That loss was followed by another $9.1 billion in 2009 and $3.8 billion through the first six month of this year, according to FDIC and bank statistics.

The JPMorgan Chase Tower at 270 Park Avenue.

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But JPMorgan’s losses appear to be tapering off. In the second quarter it had only $131 million in soured commercial real estate loans, versus $397 million in the first quarter. Still, Jamie Dimon, the bank’s CEO, sounded wary all the same in JPMorgan’s summer earnings call.

“Although we are gratified to see consumer-lending net charge-offs and delinquencies decline, they remain at extremely high levels,” he said. “As a result, these businesses did not meet expectations.”

Also, the bank continues to fight to recoup losses connected to failed home loans. Indeed, last month, it sued the FDIC for shutting down AmTrust Bank of Ohio at the end of 2009 without letting JPMorgan have a share of some of its assets. (AmTrust owed JPMorgan money for certain Fannie Mae loans before it went under, the bank claims.)



Citigroup: $14.8 billion in real estate losses*


Citigroups’s $45 billion bailout by the federal government two years ago was the biggest of the eight doled out to the big banks.

Citigroup’s headquarters at 399 Park Avenue.

The bank charged off $13.2 billion in bad real estate loans between 2008 and 2009, but seems to have stabilized a bit since. Through the first quarter of this year, it wrote down $1.6 billion in real estate loans.

While it has limped along for a while, posting losses while other banks have eked out profits, in April it reported overall profits of $4.4 billion, which was its best quarter since mid-2007. Also notable: Its stock has rebounded to about $4, after being down to around $1 in 2009.

Dick Bove, an analyst at Rochdale Securities in Stamford, Conn., who follows Citigroup, said it is somewhat protected in the real estate category because its pool of loans for home purchases was not as large as Bank of America’s or Wells Fargo’s.

And relief might be in sight.

“I believe that the write-offs have bottomed out because they are not making very many new loans,” Bove said. “I don’t think loan losses in this category will go up substantially.”

A Citigroup spokesperson didn’t return a call for comment by press time.

(*Real estate losses do not include second-quarter 2010 figures, which were not broken out in the bank’s annual report.)


Morgan Stanley trims exposure


At the end of 2008, around when it received bailout money, Morgan Stanley became a bank holding company rather than a typical investment bank, so the Federal Reserve now regulates it. Because of that, less can be gleaned about its finances.

The Morgan Stanley Building at 1585 Broadway.

But according to its annual report, which The Real Deal reviewed with an analyst, Morgan Stanley actually had about $1 billion in real estate gains in 2008, though it logged $2 billion in losses in 2009.

Unlike many of the other banks listed here, it does not issue direct home loans and therefore was not financially exposed in that area. In addition, comparing it to a commercial bank is difficult since they have different functions and aren’t regulated by the same bodies.

The company appears to have trimmed its real estate portfolio, which is split fairly evenly between residential and commercial investments. As of March 2009, it had $1.2 billion in building loans on the books, but by March 2010 (the most recent figures available) that number had dropped to $900 million.

But not all the damage seems to have been contained: In April, the bank warned investors in its $8.8 billion private equity real estate fund that it may lose two-thirds of its value because of bad property deals around the globe, the Wall Street Journal reported. In 2009, Morgan Stanley had written down most of its own exposure to the fund, the Journal wrote, though it hasn’t disentangled itself from all the properties that it owns. Simultaneously, though, the bank is in the process of raising a similar real estate-centric $10 billion fund, according to reports.


Goldman Sachs ups the ante


Like Morgan Stanley, Goldman changed its ownership structure around the time it got Washington bailout funds. It also does not issue direct home loans.

Nonetheless, according to its annual report it had net write-downs of $3.5 billion in real estate investments in 2008 and $1 billion in 2009. While commercial-backed bonds were down, residential investments were slightly up.

Goldman Sachs’ new headquarters at 200 West Street.

In recent months, Goldman appears to have slightly increased its real estate bets, according to the Federal Reserve’s quarterly reports. It had $567 million of real estate assets in the third quarter of 2009 and upped that to $689 million by March 2010, the most recent date on record. That figure also apparently does not include its own new digs at 200 West Street in Lower Manhattan, which is a 43-story glass tower with a price tag of about $2 billion.

Troubles dogged the bank this spring when Goldman had to pay a $550 million fine to the SEC for misleading investors about certain types of real estate-backed bonds. Still, the bank was holding $871 billion in total assets at the beginning of this year and Goldman’s CEO, Lloyd Blankfein, seems to be faring well. Last month, he cashed out 9,000 company stock options for $6.1 million. And he sold his apartment, a five-bedroom duplex at 941 Park Avenue, for $12.5 million that same month.

Additional reporting by Caren Chesler