Harry Macklowe Takes a Bath

How much money has New York property magnate Harry Macklowe lost over the past year? Jennifer Forsyth in the WSJ says that it's more than $2 billion, although it's not obvious where she's getting her numbers from. Mish is more precise, saying that $2.4 billion has been "vaporized", although I'm unclear where that number comes from either.

What does seem to be clear is that Macklowe has lost control of the seven buildings he bought for $7 billion in 2007, although he only put up $50 million of his own money at the time. He stands to lose almost everything, it would seem:

Mr. Macklowe pledged a personal guaranty of $1 billion for that loan, as well as his interests in 12 other properties, including the prized General Motors Building on Fifth Avenue that overlooks the Plaza Hotel and Central Park.

Where did Macklowe go wrong? Simple: he overpaid, and he borrowed short. Macklowe essentially took out a one-year mortgage on the office buildings, which left him massively exposed if and when the commercial mortgage market closed down in the wake of the acquisition. What's more, his debt service was higher than his rental income, and his equity cusion was minuscule. All of which was a recipe for disaster.

Mish asks a simple question:

I am trying to understand the mentality of someone worth billions, willing to risk a huge portion of it, perhaps almost all of it, in an attempt to make more billions. What was it he thought he knew that Sam Zell didn't?

I think I can hazard an answer. No matter how much money he loses on this deal, Macklowe will always have enough money to live very comfortably for the rest of his life. The billions aren't for spending, they're for keeping score. And if his bet played out according to plan, Macklowe might well have overtaken even Zell on the rich list. After all, look what happened to his investment in the GM building: he bought it for $1.4 billion in 2003, and saw its value reach as much as $4 billion within a few short years. A few more investments like that, and he could have been worth some real money.