Goldman Whitehall head warned of firm's exposure

NEW YORK Wed Dec 3, 2008 3:18pm EST

NEW YORK Dec 3 (Reuters) - Goldman Sachs Group Inc (GS.N) real estate head Stuart Rothenberg told an industry group last month that the firm had put more of its own capital at risk as the commercial real estate market was peaking in mid-2007.

Goldman had increased its equity stakes in the Whitehall fund family it manages and had invested more of its own balance sheet in commercial property when markets were booming, Rothenberg told the Real Estate Board of New York on Nov. 6 .

"The firm was, for all intents and purposes, almost an enlarged hedge fund for the past couple of years, where the more (investing) we could do on balance sheet and the less we could do in the funds, the more we did," he said.

Rothenberg's remarks came one week before he announced plans to retire at year-end and were a rare example of a Goldman executive discussing the company's business in a public forum. The Real Estate Board session was open to the press.

After rising for decades, property values began falling last year as economic weakness and a global credit crisis began to take their toll.

Exposure to this weakening market could add to Goldman's woes. The firm is already expected to report a fourth-quarter loss of $2 billion, driven by falling prices for a wide range of equity and fixed-income assets.

Goldman did not return calls seeking comment. Rothenberg, 45, who joined Goldman 21 years ago and has run the real estate unit since 2003, could not be reached for comment.

UPPING THE ANTE

One of the world's biggest commercial property investors, Goldman's real estate division has raised more than $26 billion from the bank, its executives and outside investors since 1991. Nearly $8 billion was invested in the past two years.

Whitehall participated in the buyout boom, acquiring real estate companies when property prices peaked, such as the June 2007 purchase of Equity Inns Inc for $1.3 billion.

Last February, a Whitehall fund purchased American Casino & Entertainment Properties, which includes the Stratosphere casino in Las Vegas, for $1.2 billion from billionaire Carl Icahn.

Rothenberg, 45, told his audience that beyond Whitehall, Goldman had been increasing its direct exposure to real estate through principal investments, which means putting its own balance sheet at risk.

Even within the Whitehall family, named for a Manhattan street near Goldman's headquarters, the company was taking a bigger piece of the action and taking on more risk.

"The firm used to be 15 percent of the capital in each fund, then 20 percent of the capital in each fund, and then over the past few years it had been about 35 percent of the capital in each fund," Rothenberg said.

The firm said in a recent regulatory filing that its employees contributed 36 percent of the $14 billion committed to five funds in 2007 and this year.

In addition, "we were investing a lot on balance sheet, so in each fund we carved out more and more so we could do them on balance sheet and get more and more exposure," he said.

Those days are over, he said. Looking ahead, Rothenberg said Goldman would focus on buying debt.

"Right now our primary vehicle isn't as much our traditional Whitehall equity fund or our traditional Goldman Sachs Capital Partners. It's our senior loan fund; it's our mezzanine fund," he said.

Whitehall intends to put its $6 billion of equity to work buying up distressed real estate assets, he said. Goldman reported $3.9 billion of real estate investment exposure on its books at the end of August.

Real estate has long been a huge money maker for Wall Street, but in the past year sinking markets have created humbling losses for the most aggressive players.

Lehman Brothers went bankrupt in September, in no small part because of exposure to devalued real estate investments such as property developer Suncal Cos and Archstone-Smith, an apartment building real estate investment trust.

Morgan Stanley (MS.N), one of the world's largest real estate investors, earlier this year suffered a $150 million hit from an investment in Crescent Real Estate.

Likewise, Whitehall is struggling with poor performance and potentially big losses on recent investments. The firm marked down equity in its $4.8 billion Whitehall 2007 fund by half, The Wall Street Journal reported Wednesday. (Editing by John Wallace)

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