AIG posts 500 million pound collateral on Canary Wharf leases

Marketwatch ^ | March 26, 2009 5:25 a.m. EDT | Jonathan Buck

[Ernest_at_the_Beach]

LONDON (MarketWatch) -- American International Group Inc has been forced to post more than GBP500 million as collateral to cover possible defaults on rental payments on properties in Canary Wharf leased by Lehman Brothers Holdings Inc. and Citigroup Inc. The move was triggered by a fall in the credit rating of AIG, which provides securitization to insure the leases.

AIG posted cash collateral of approximately GBP224 million to cover Lehman's lease on 25-30 Bank Street and GBP276.3 million to cover Citigroup's rental obligations at 33 Canada Square.

There is no suggestion that either tenant is likely to default, even though Lehman entered administration Sept. 15.

[Ernest_at_the_Beach]

Wonder if anyone say this coming...that is a good sized pile of cash.

[GeronL]

wow... taxpayer dollars at work.

where is ACORN on this?? Thats a lot more than the bonuses

[Ernest_at_the_Beach]

anyone SAW this coming!

[Ernest_at_the_Beach]

I bet there is a lot more of this kind of stuff...

[PubliusMM]

Wonder where that money is coming from...

[GeronL]

how much “bailout” money is leaving the country??

[rockinqsranch]

I would believe it as something one could have foreseen within AIG circles. “H” long established companies with long established credit lines are being forced to pay up front for product to sell, or to pay COD these days. A bit of a clue there as to trust in the market.

One might think it time for AIG to consider a low rent district for their offices.

[Ernest_at_the_Beach]

This is not money for their offices,...it is some kind of insurance for officies for Lehman Brothers...which is Bankrupt...and Citigroup..

At least as I read it.

[Ernest_at_the_Beach]

Check your pay Stub....

[JasonC]

Correct.

It seems that remarkably few people around here know what "underwriting" is...

[OCC]

At Bank Street, where Lehman leases more than a million square feet of office space

Thats a lot of cubical space!

[JasonC]

Hardly. Collateral isn't a cost. AIG has investments, in bonds or whatever, and it simply pledges some of those as collateral, that Lehman or Citi will pay their leases as due. AIG still owns those investments, and still earns all the interest on them. It is also collecting its underwriting fees for guaranteeing the payments if either Lehman or Citi break their leases. None of this is a cost.

[Ernest_at_the_Beach]

So Lehman is still paying their lease?

[rockinqsranch]

OK...Gotcha. I have been scanning as I have to get out of here for a few hours, so I’ll look at this again later as I should have in the first place LOL.

Offline for a few.

[JasonC]

Yes of course. The brokerage division was sold to Barclay's.

[Ernest_at_the_Beach]

Hmmm....

Lehman Brothers Holdings Inc. has filed for bankruptcy protection in the U.S.

*********************************************

Lehman Brothers Holdings Inc. has filed for bankruptcy protection in the U.S.

SEE BELOW FOR MORE INFORMATION ON LEHMAN BROTHERS HOLDINGS INC. AND THE DISPOSITION OF BUSINESSES AND
SUBSIDIARIES OF LEHMAN BROTHERS HOLDINGS INC.

Barclays acquires Lehman Brothers, North America		Lehman Brothers Holdings Inc.		Information on other former Lehman Brothers businesses
For information regarding Barclays Investment Banking and Capital Markets, please visit www.barcap.com For information regarding Barclays Wealth, please visit www.barclayswealthamericas.com		For information regarding the Chapter 11 Filing, please visit www.lehmanbrothersestate.com		For information related to Neuberger Berman, please visit www.nb.com For inquiries related to companies in the UK and Europe in administration, please contact PricewaterhouseCoopers LLP at www.pwc.co.uk For information related to the acquisition of Lehman Brothers Asia-Pacific business, please view Nomura press release or visit www.nomura.com For information related to companies in Hong Kong in administration, please view KPMG News or contact KPMG at http://www.kpmg.com.hk

The information and links above are provided solely as a convenience to assist users who may be seeking information on Lehman Brothers Holdings Inc. or former Lehman Brothers businesses and operations. The owner of this website does not endorse nor is responsible for any content, information or other related materials that maybe accessed through the links above or has been provided by unrelated parties.

[Ernest_at_the_Beach]

Just looking thru info...see #17...wonder if Barclays is occupying the space in London or whether it is Price Water House....

[marshmallow]

The WSJ reporting that the collateral on Lehman's lease is held in AIG bank accounts at the London branch of the Bank of New York Mellon. According to a previous filing, AIG Financial Products Corp. supplied the securitization of the leases through credit-default swaps.

Collateral isn't a cost but the thing that caused the need to post it (a downgrade in credit ratings) can indeed be costly as it may lead to reduced credit availability. In the case of AIG, however, that shouldn't be a problem as any slack will simply be picked up by you and me.

[SunkenCiv]

One sidelight question — Canary Wharf... how do they keep the canaries from flyin’ off before they get ‘em unloaded?

Thanks Ernest.

[dennisw]

Correct.

It seems that remarkably few people around here know what "underwriting" is...

More hare brained underwriting (as you put it) on par with what AIG did with credit default swaps.
But when I do stupid things I lose money
When AIG does stupid things it makes money!!
Or at least its genius employees do
 I wonder what kind of bonuses this "underwriting" team took home?

What is going on here is that parties are demanding that AIG prove it make good on what it underwrote. By posting collateral aka reserves. What a novel idea!

[dennisw]

Insurance companies traditionally held reserves against losses and were required to by state laws. Credit default swaps were an end run around such requirements

In this case the collateral demanded = reserves
Meaning proof you can honor the insurance commitments you are profiting from

[Marine_Uncle]

"One sidelight question — Canary Wharf... how do they keep the canaries from flyin’ off before they get ‘em unloaded?"
Maybe they have a giant net they can wrap around the wharf.

[Liz]

Canary Wharf--One Canada Square

BACKGROUND In 1987 the Canadian Reichmann brothers became interested in London's vast Canary Wharf development, a municipal initiative whose goal was the transformation of former docks east of the city into a new corporate office center intended to rival the city's centuries-old business district.

Canary Wharf called for the eventual construction of twenty-four buildings containing twelve million square feet of office space to be connected to the city center by new rail and subway links.

However, lack of financing halted construction until the Reichmanns agreed in 1987 to pump several billion dollars of their own money into the project and serve as its managing partners. The Reichmanns' reputation as savants reassured other lenders, and development of Canary Wharf finally proceeded, promising no less than a restructuring of London's commercial office market and the possible formation of a new center for business throughout Europe.

The Reichmanns' most lucrative deals had occurred in the middle of real estate recessions (the Uris purchase in 1977 and the World Financial Center in 1980), prompting many observers to admire their courage and foresight when the market strengthened and their projects became gold mines. Canary Wharf, on the other hand, was initiated at the height of a real estate boom which had already enjoyed five years of solid growth.

When the bottom fell out in 1989, the Reichmanns found themselves in serious trouble along with the ninety-odd banks and other lenders who had put their faith in the Reichmann mystique.

To make matters worse, their company Olympia & York was also completing work on 55 Water Street in New York City, the world's largest single office building as measured by square footage, and the brothers had become entangled in the decline of Campeau Corporation, the Canadian retailing conglomerate in which the Reichmanns were major shareholders.

[Liz]

"Securitizing" music albums went kaput----didn't foresee iPods, net downloads, exploding technology.......

Bowie Bonds ---- are asset-backed securities of current and future revenues of 25 albums (287 songs) that David Bowie recorded before 1990. Issued in 1997, the bonds were bought for $55 million by the Prudential Insurance Company. They paid an interest rate of 7.9%.

Collateral was royalties from the 25 albums. The average life of the bonds was ten years.

By forfeiting ten years worth of royalties, Bowie was able to receive $55 million up front. Part of the money was used to buy out some rights to Bowie's songs owned by a former manager. Bowie was able to issue the bonds because, unlike many artists, he had kept control of his copyrights and master recordings.

The Bowie Bond issuance was perhaps the first instance of intellectual property rights securitization. The securitization of the collections of other artists, such James Brown, Ashford & Simpson and the Isley Brothers, later followed.

The Bonds are named Pullman Bonds after David Pullman, the banker who pushed the original Bowie deal. In March 2004, Moody's Investors Service lowered the bonds from an A3 rating (the seventh highest rating) to Baa3, one notch above junk status.

This downgrade was prompted by lower-than-expected revenue "due to weakness in sales for recorded music." A downgrade to an unnamed company that guarantees the issue was also cited as a reason for the downgrade.

[SunkenCiv]

Maybe the whole thing is just painted yellow.

[Marine_Uncle]

Could be the case. Canary yellow comes to mind.