Reverberations

Yesterday's trifecta of bad news: bankruptcy of Lehman Brothers and the purchase of Merrill Lynch by Bank of America, and then the news of the teetering AIG, sent stocks reeling. People look at their portfolios and wonder where the money went.

Companies are looking to scoop up Lehman Brothers assets in a firesale, which is being overseen by Bankruptcy Judge James Peck. One group of folks who will see a big payday in all this is the bankruptcy attorneys who are involved in the unwinding of Lehman's assets.

Lehman's asset management group conducted business as usual, but its stock was virtually worthless - settling at 21 cents from a $67.73 a share high a year ago. That amounts to a wipeout of $46.9 billion in value.

Meanwhile, the Securities and Exchange Commission set up a task force to monitor the transfer of billions in assets to new owners in the Wall Street fire sale of the century.

In its bankruptcy petition, Lehman said its 10 biggest creditors are owed $157 billion, most of whom are bondholders. The creditors' list of about 100,000 names was so large that Lehman got an extension of up to 45 days to file it.

In addition to the ripple effect of layoffs throughout the New York City metropolitan region, it also has significant effects on the real estate market in Manhattan and Northern New Jersey.

These companies have a huge presence in Manhattan, and bankruptcies, reorganizations, and uncertainty surrounding AIG means that valuation of properties, to say nothing of what becomes of space at the World Financial Center, Lower Manhattan, and other major office buildings throughout the city is uncertain at best.

It also means that some projects, like a proposed office tower above the Port Authority Bus Terminal, might get delayed or shelved indefinitely. It goes without saying that it also means that the rebuilding at Ground Zero might take a hit as office space might be more difficult to lease as there are fewer willing tenants, although incentives might lure businesses to switch from more expensive locations throughout the City to Ground Zero locations, shifting the burden on to landlords to keep prices low.

In other words, we may start to see a serious correction in real estate prices in the New York metro area for commercial space.

That, in turn, follows a more significant correction in residential real estate, because of the layoffs in the financial services market.

Meanwhile, Washington Mutual is also facing a cash crunch, and Moody's and Standard and Poor's both cut their ratings on the stock. It's been downgraded to junk status, raising fears that WaMu might be headed for a fall as well.

UPDATE:
The NY Sun puts some perspective on the commercial real estate situation, noting that AIG, Lehman, and Merrill Lynch hold about 2.2% of the 450 million sf of commercial space in Manhattan. That said, the situation with those companies will have a ripple effect, particularly in Lower Manhattan.