Data Centers Crucial To Lehman Sale

miller60 writes "What assets retain value in the midst of a financial panic? Data centers. When assets of bankrupt Lehman Brothers were sold to Barclays Tuesday for $1.75 billion, Lehman's data centers and headquarters accounted for $1.5 billion of the value in the deal. That echoes the JPMorgan-Bear Stearns fire sale, in which Bear's two data centers and HQ represented much of the sale price. Amidst financial turmoil, Wall Street's high-tech data centers become the crown jewels for buyers of distressed assets."

Asset valuation programmer seeks job

Hi! I'm a programmer for Lehman brothers and I'm looking for work. I was the designer of Assett Manager 1.0, a powerful tool that allowed our brokers to get values of our contracts....it's not a bad program, but it had a couple of bugs in it that I would like to have fixed.

Re:Asset valuation programmer seeks job

Idiots buying houses they couldn't afford so they were foreclosed and sold for cheap.

Companies enabling idiots to buy things they can't afford have their own assets siezed and sold for cheap.

Poetic Justice(tm)

Re:Asset valuation programmer seeks job

Nice. I'm sure this whole mess boild down to 'idiots buying houses they can't afford' and the companies who enable them.

No, I'm sure no normal people got hurt in this mess, only bad, dumb people or greedy people who deserved it. I'm sure no first time home owning, hard working parents with dreams of getting out of the ghetto were suckered into ARMS that would screw them over at the first downturn. Nope. Couldn't happen.

I'm sure no one with a job they thought was secure got laid off and found their finances spiraling out of control, then found themselves and their kids living in their car. Nope. Not in America.

Have a heart, man. Don't try to make reality fit your worldview that everything is fair, hard work is always rewarded, and only bad people have bad things happen to them. People are born with compassion and empathy circuits in our brain for a reason, and those that don't have them or can't use them are seriously handicapped.

Re:Asset valuation programmer seeks job

Hey...where are your empathy circuits?! I can't believe you would call Republicans seriously handicapped...

but

People are born with compassion and empathy circuits in our brain for a reason, and those that don't have them or can't use them are seriously handicapped.

...But will probably get elected anyway. :(

There's a difference between 'dumb' and 'trusting'

Also, a difference between 'dumb' and 'uneducated about financial matters.' Is there a class on ARMS in high school people can take? I don't think those are covered in home ec.

People can't be experts on every field. Add to that fact that finances bring up survival fears in most people, and fear shuts down the brain, and you will see that many people may be smart in many areas, but uneducated about finance.

So people have to trust the experts they hire to do right by them. When those experts say, "Hey, you can own a house now and save that money you were putting into rent. Don't read the fine print, it's boring and it doesn't matter," people trust those experts. And they were misled.

Finally, I know you probably agree with me but I have to point it out: dumb people do not DESERVE to be taken advantage of by smart people. Social Darwinism is an inherently fascist, evil, and anti-social philosophy that destroys societies and people's lives. Don't subscribe to it. Society works because of trust, and social Darwinism destroys that trust.

Re:There's a difference between 'dumb' and 'trusti

I have to point it out: dumb people do not DESERVE to be taken advantage of by smart people. Social Darwinism is an inherently fascist, evil, and anti-social philosophy that destroys societies and people's lives. Don't subscribe to it. Society works because of trust, and social Darwinism destroys that trust.

Quoted because it deserved to be posted twice.

Re:There's a difference between 'dumb' and 'trusti

Also, a difference between 'dumb' and 'uneducated about financial matters.' Is there a class on ARMS in high school people can take? I don't think those are covered in home ec.

No, you're mixing two separate things up. If you don't understand ARMs that doesn't make you dumb. But if you then buy one and you don't understand them, that definitely makes you dumb. What the hell?! A mortgage is a huge commitment. You're going to be paying it back for a long, long time. If somebody commits to a huge thing, turns around and says "Oops! I guess I can't deal with this after all. It was scary and my brain shut down" then I don't see why they are deserving of much sympathy.

So people have to trust the experts they hire to do right by them. When those experts say, "Hey, you can own a house now and save that money you were putting into rent. Don't read the fine print, it's boring and it doesn't matter," people trust those experts. And they were misled.

No, they were stupid. The risks involved with large debts are enormous. This is way different than being misled by a second hand car salesman and buying a SUV with poor mileage. This is a vast sum of money. If there's one time in your life you read the boring fine print and think about it really hard, it's when taking out a gigantic loan.

Finally, I know you probably agree with me but I have to point it out: dumb people do not DESERVE to be taken advantage of by smart people. Social Darwinism is an inherently fascist, evil, and anti-social philosophy that destroys societies and people's lives. Don't subscribe to it. Society works because of trust, and social Darwinism destroys that trust.

Now this I do agree with. However trust can cross a line into blindness. Somebody who does whatever they're told without considering the consequences eventually crosses the line from being a poor innocent misled person into something else - a liability to society.

Re:Asset valuation programmer seeks job

The trouble is that this has NOT been happening as long as mortgages have been around.

Anyone that knows anything about econ knows at the core Economics is about incentives.

In the last 10-15 years inventives in real estate have been flipped backwards.

Let's just take a few examples:

#1 The rise of a secondary market for mortgages.

There was a time when most mortgages were self-funded. The bank would fund the mortgage out of its own pocket. If they were sold, it was to FNMA.

Banks had a real incentive to do solid deals on homes with proven valuations.

In the late 90s the secondary market exploded. Somebody figured how to sell just portions of a mortgage by combining it with portions of other mortgages into a MBS (Mortgage Backed Security) and these securities were sold as ROCK SOLID CREDIT opportunites. The reason?

#2 The derivatives market and other developments

The derivatives market is valued at an est. 6tn. Bigger than stocks. Bigger than bonds. This and other developments, like the consolidation of the IBank industry led to real issues with the 3 credit rating agencies. There began to be financial incentives to give good, AA and AAA ratings to securities.

So these MBS's were given, yes, A, AA and even AAA ratings. You have to understand that AAA means "rock solid investment." That is, a AAA credit rating is considered to be as good as a t-bill.

#3 Brokers
Since banks sold mortgages to the secondary market, all of a sudden you didn't NEED $200k for 15 years to lend somebody $200k. All you needed is $200k for 180 days. This led to the rise of mortgage brokers. With far less scrutiny than banks, it was easier to fudge numbers to get deals made.

This led to an array of CRAZY financial instruments designed basically just to make a profit for the lender.

Take the infamous NINJA loan: No Income, No Job, No Assets. That is, you're given a mortgage based on nothing but good looks and your credit score. Nothing else is verified.

Or the interest-only loan with a balloon payment.

Or ARMs.

Technology played a part, too. A small role, but still, being able to access a HELC via a debit card makes that TV purchase or riding lawnmower or whatever a lot more tempting.

All of these things casue real issues with inventives.

Who is the appraiser working for? Well, he's hired by the loan officer. Who is the loan officer working for? Well, he's not lending his bosses money anymore, since the mortgage will be sold in 90 days after close anyway. Who is the agent working for?

This has NOT been business as usual. Make no mistake about that.

Re:Asset valuation programmer seeks job

Take the infamous NINJA loan: No Income, No Job, No Assets. That is, you're given a mortgage based on nothing but good looks and your credit score. Nothing else is verified.

The big problem with the NINJA loans was that the interest rates given on them did not reflect the risk. Typically NINJA loans were made with just a 1-2% premium over standard loans. They should have been assigned a Phenomenally Increased rate (at least a 5% premium), or PIRATE -- which would have held them in check.

However, because the NINJAs were allowed to go unchecked, we still have a dearth of PIRATES, and thus heavy global warming in addition to the credit crunch.

Re:Asset valuation programmer seeks job

The problem really started with you. And here's how. You elected the government, which adopted legislation, which enabled the lenders to give loans to unreliable borrowers, who would buy hugely overpriced houses they could not afford, that would go down in value because they were never worth their price in the first place, sending real estate business down the drain, closely followed by construction, mortgage, and insurance industries, that form the core of the country's financial system, which is controlled and guaranteed by the government, which borrowed trillions from EU, Japan, China and Russia to fight wars abroad for no particular reason, which dropped the value of the dollar, which caused energy prices to skyrocket, which accelerated our country's economic recession, which made it necessary for the government to spend more of your money to prop up this whole pyramid scheme we call the "free market". And how did all of this start? With too many of us voting for the idiot who couldn't spell "economy", let alone understand it.

Re:Asset valuation programmer seeks job

"We owe it all to the bedrock of our economy: the ordinary hard-working taxpayer. You resisted the siren call of credit cards, lived within your means to save for a rainy day, never took out an interest-only mortgage, credit score to make Jesus cry. Without taking every penny you saved over the $100,000 guarantee, we'd never have made it. And the best bit is, we know you'll still vote Republican! [today.com] God bless you all!"

No DR Site?

I guess this is one 'disaster' Lehman Bros couldn't failover?

Suprising?

What assets retain value in the midst of a financial panic? Data centers.

You know what else retains value in the midst of a financial panic? Skyscrapers.

Anytime you have physical assets, you have value. Especially if those physical assets are in continuing demand. (Which data centers are in particular, because the Technology sector is doing quite well right now.)

The only difference is that companies rarely own their own spaces anymore. They sold them off to realty companies long ago, because they didn't want to be in the real-estate business. This sort of sell/lease arrangement is almost certain to become common with data centers in the future. CoLos are already the standard of the industry, and are going to take over increasing amounts of large corporate business in the future.

Re:Suprising?

You know what else retains value in the midst of a financial panic? Skyscrapers.

That's true... Unless there's a real estate crisis coincident with the financial panic.

Sure, a sky scraper isn't going to lose all it's value, but it could be worth less than you paid for it - especially if companies are failing by the dozen and your prospects for new tenants aren't good.

Also from the irony department: Lehman didn't own it's London offices, and the rent Lehman paid for the space was 15% of the landlords total income. The landlord, thinking ahead carried insurance to protect against the eventuality that one of their major tenants would vacate. Their insurance company: AIG.

Re:Suprising?

Sure, a sky scraper isn't going to lose all it's value, but it could be worth less than you paid for it

I somewhat doubt Lehman is making a profit on their data centers, either. What they are doing is liquidating the assets that have value.

The landlord, thinking ahead carried insurance to protect against the eventuality that one of their major tenants would vacate. Their insurance company: AIG.

As amusing as it is, that's exactly why AIG is in trouble. Each tier saw the risk coming and tried to pass the risk upstream. The problem is that the risk was not isolated. With all these upstream pushes, the risk ended up concentrated in the largest companies in the market. It's no coincidence that AIG is one of the largest insurance underwriters in the world.

Re:Suprising?

Uhh... is the technology sector doing well?

Indeed. It's one of the few sectors where rapidly rising oil costs and plummeting property values has little effect. As a result, the sector is one of the strongest in the market today. And not just because people must have the latest and greatest software and gadgetry. (Consumers actually have less money for that.) Instead, technology is seen as a possible solution to the problems plaguing other industries.

Real world example: UPS developed software to route their trucks through fewer left turns. This rerouting reduces fuel costs and thus produces tremendous savings for the company.

Not surprising, but not really about data centers

Is it any surprise that the most valuable assets in a company that is going down the tubes would be its physical assets, real estate, etc? The summary itself says data centers AND HEADQUARTERS. What a shock that "datacenterknowledge.com" is telling us how valuable and important data centers are. I'm almost tempted to say this is spam, but I can't be bothered to go to the website to learn more about it.

This is a Fire Sale, Hard Assets Count Period

First of all, these are unprecedented times in global financial markets. Once in 100 years is putting it mildly.

Second, a data center and a building are the only assets that can be valued with the shotgun marriages the Administration, Treasury, and Fed are making right **now.** By now, I mean no sleep, no one leaves until the deal is closed NOW.

BofA got a sweetheart deal with Countrywide, they are getting another sweetheart deal with whatever brokerage they acquire. The same holds true of JPMorgan Chase and Co.

The Fed has literally run out of money with the AIG nationalization and has asked the treasury to print more dollars NOW. http://www.ft.com/cms/s/0/271257f2-83f1-11dd-bf00-000077b07658.html [ft.com]

Once again, the losses are being socialized while the titans of financial executive management just walk away.

You would be wise to re-balance your asset pool to reflect coming inflation. And any pension holders out there should do your best to liquidate your pension today, that is, if your pension isn't underfunded already or if that is even possible.

Terrible Article & Summary

I am an investment banker and can say with confidence that the datacenters were an afterthought in this deal. Important? Certainly. The most important? a joke. Bob Diamond and Barclays have wanted to extend its US investment banking business for several years, and found an opportunity to grab one at a fire sale. But the true value of the deal is enormously larger than listed, as it involves taking on assets estimated (with confidence, I'm sure)at $72 billion and liabilities of $68 billion. I'd recommend reading http://www.ft.com/cms/s/0/5c9dcc26-83f1-11dd-bf00-000077b07658.html?nclick_check=1 [ft.com] to inform yourselves about the transaction.

As to the Bear Stearns datacenters comprising the bulk of the value - that is about as wrong as you can get. The breakup fee (the fee paid to JP Morgan if the deal did not go through) was the building. JPM could have walked from the deal and gotten the builing, so to argue that the deal was for the building/datacenter is absurd. Let's not forget that the Federal Reserve alone lent $29 billion for the transaction. Datacenters are valuable, but not worth that amount of money.

Re:It's all about the data

No. it's all about avoiding the expense of building one yourself. The actual data in those centers may or may not be worthwhile to the buying organisation, but the floor space and ready-to-roll IT structure most certainly is.

Posted anon since I was involved in one of these things recently.

Re:It's all about the data

Posted anon since I was involved in one of these things recently.

At least, it would have been if I'd had a brain.

OK, since my name's out I'll finish the job. The operations are most likely valuable, as are the apps running in there. However, come merger and consolidation time merely having those centres around is a tremendous advantage. These things cost serious amounts of cash, and the electronic transaction volumes are growing all the time - yes, even now. So the raw existence of a pre-equipped building is the thing, not necessarily the data files within it.

Cheers,
Ian

Re:It's all about the data

And let's not forget the multi-gigawatt generators, the fail-over system, the trained staff, the fire suppression systems, the network infrastructure, the secured access, etc., etc., etc.

The actual servers in the racks are the LEAST valuable part of a good data center. They're also the highest depreciating.

Re:It's all about the data

Almost! It's actually about the location of the data center, i.e, close to the exchange. A fast, low latency connection to the exchange gives you a crucial edge over the competition. It means when things change you can get your trades in before your competition does. This is ever more important in the up-and-coming automated trading systems.

Re:It's all about the data

Information is timeless and valuable.

I just can't agree with this. When something is timeless that means that it does not age. But information does age. Virtually all information ages; all information relating to human affairs certainly does. The aging of information can be measured not merely in whether it is forgotten, or known, but in how it is considered. Remember: we can still watch the original series of Knight Rider on re-run channels. This does not mean it is 'timeless'. It would be too polite to call it anachronistic.

Even for example the information we have about the collapse of Lehman.

Two weeks ago that information would have been worth billions.

Now it is common knowledge, and the details must be investigated, after the fact.

In twenty years it will be of historical interest, taught in economics classes.

In a thousand years it may have been forgotten.

The very fact that we have already seen different states of this information over two weeks means that it is not timeless.