Rising Archstone

Lehman/Archstone: Archstone didn’t make Lehman Brothers stronger, it killed it. Yet the US apartments giant has found a new lease on life for itself by swapping $5.4 billion of debt for equity. Of course, Lehman’s huge exposure to the company didn’t single-handedly slay the Wall Street firm. But its involvement in Archstone’s awfully timed 2007 leveraged buyout alerted the world to the risks Lehman was taking in commercial real estate and has since become emblematic of all that went wrong at the investment bank.

Lehman had been hoping to copy Blackstone’s canny profiteering from taking private and rapidly dismembering Equity Office Properties. Lehman executives reckoned the deal would bag the firm $1.3 billion in earnings over a 10 year period. But the $22-billion Archstone deal was struck just as the mortgage financing market cratered. That left Lehman holding not just $3.5 billion of debt - having managed to sell $10 billion to Fannie Mae and Freddie Mac — but also just over $2 billion in bridge equity.

Concerns about just how much the investment bank had kept on its balance sheet and whether it had marked it to market appropriately quickly surfaced - and led to greater scrutiny of another $1.6 billion in bridge equity and some $40 billion or so of debt, all to commercial real estate.

The Lehman autopsy conducted by court-appointed examiner Anton Valukas singled out the Archstone deal as the one which tipped Lehman over its risk limits - though executives didn’t notify the board for almost four months. Even the Office of Thrift Supervision, usually a supine regulator, chastised Lehman for the deal.

Archstone, though, lived on. And its new restructuring should put it on more solid footing in the wait for a real estate recovery. There’s at least a small silver lining for Lehman: it still owns 47 per cent. Yet it’s precious small compensation for the lasting reminder of history’s largest bankruptcy.