Two board members of General Growth Properties Inc. marched into CEO John Bucksbaum's office to deliver a blunt message: It was time for him to resign.An internal investigation showed that Mr. Bucksbaum's family trust had violated company policy by making private student loans to two company officers and failing to inform the board. The departure of Mr. Bucksbaum -- whose father and uncle founded the giant mall owner 54 years ago -- would mark an end to the family's management control of the company.
"I accept the decision," Mr. Bucksbaum said, according to people briefed on the Oct. 24 meeting. "I'll do what's in the best interest of the company and its shareholders."
Yet the harm to the legacy and the fortune of the Bucksbaum family -- one of the richest and oldest real-estate dynasties in America -- had already been done. Aside from the alternative student loans, made to prevent a massive stock selloff by executives, Mr. Bucksbaum and his deputies in recent years loaded the company with debts totaling more than $27 billion. General Growth's stock has plunged more than 97% in the past year, dragging down the Bucksbaum family fortunes with it. The Bucksbaums' 25% ownership stake, worth $3.2 billion just six months ago, is now worth $116 million.
The family could lose General Growth altogether, along with three generations of hard work that began with a grocery store in Iowa. If the company can't negotiate new terms with lenders by midnight Friday, and those banks declare the company in default, General Growth has told investors it could file for Chapter 11 -- creating one of the largest bankruptcies ever in real estate.
It was a difficult year in real estate. And, as WSJ's Alex Frangos explains, it's unlikely to get any better as a looming crisis in commercial real estate is on the way. (Dec. 8)
The Bucksbaum's losses show how the 2008 financial crisis is hitting not just risk-loving Wall Street firms and leveraged upstarts but also long-established, family-run companies with histories of conservative growth. The crisis has sparked the most rapid and severe destruction of wealth in recent history, rivaled only by the Great Depression, when the number of millionaires plunged by an estimated 75%.
The fallen fortunes span the globe, from Sheldon Adelson, the Las Vegas casino king whose paper fortune has dropped by more than $25 billion in the past year, to Germany's old-money Merckle family and Indian steel magnate Lakshmi Mittal. Even Bill Gates and Warren Buffett, the dynamic duo at the top of the global billionaire ranks, have seen the value of their corporate shares shrink by $12 billion and $15 billion, respectively.
Many got caught in an unavoidable downdraft. But others have themselves to blame for making things worse. The crisis has been particularly hard on executives who gambled badly with their business -- they got into the wrong industry at the wrong time, took on risky investments, piled too much debt on their companies, or leveraged their own finances to a catastrophic degree.
The decline of General Growth is as much a matter of pride as it is money, since the Bucksbaums are still wealthy by any standard. They've collected roughly $590 million in dividends from the company since 1997. Martin and Matthew Bucksbaum, the company's founding brothers, were astute financial investors who also made more than $1 billion from early investments with hedge-funder Edward Lampert, investor Jack Nash and Goldman Sachs, according to two financial advisers to the family. And the company's malls are still among the strongest in the U.S., with an overall occupancy rate of about 93%.
Matthew Bucksbaum declined to be interviewed regarding his personal finances or General Growth's struggles. John Bucksbaum says he remains "actively involved" in the company as chairman of the board, adding, "We have great assets, great employees. Our issues are not with the operations of these properties, it's with the balance sheet. We'll be able to restore the value that these properties hold."
Short of cash and unable to make debt payments, General Growth is struggling to sell off some of its prized malls and properties, including three on the Las Vegas Strip. It has $900 million in loans due on Friday, another $3.1 billion due next year and, in a leftover from its acquisition of competitor Rouse Co. in 2004, the company could owe up to $1 billion to the heirs of legendary tycoon Howard Hughes. The company has hired law firm Sidley Austin LLP to advise it in the event of a bankruptcy filing.
"This family worked so hard for so long to get where they are," says Morris Mark, president of Mark Asset Management and a former board member and friend of the family's. "It's sad to see the company in such difficulty."
A Grocery Fortune
The Bucksbaums, rooted in the mom-and-pop grocery business of Iowa, are a tightknit, driven and intensely private family. Martin and Matthew Bucksbaum started in 1954 with a small shopping center in Cedar Rapids, which they built to house one of the family's grocery stores. They installed trampolines in the parking lot on opening day for visiting children and opened a Kinney Shoes and a Woolworth.
The project's success led them to open more shopping centers. As America's suburbs started to boom, they started building large indoor malls, a strategy known among mall builders as "following the rooftops."
Martin, known as the more commanding of the two brothers, was obsessed with financial details, spending late nights in the office poring over leasing statements or depreciation schedules, and rarely taking vacations. He was a strategic visionary, credited by some urban planners -- and blamed by others -- for the early malling of America. He had few hobbies and died in his sleep from a heart attack in 1995.
In a series, The Wall Street Journal profiles leading figures in the business world whose fortunes have taken a big hit in the financial crisis since the Great. See profiles of real-estate moguls who have suffered in the downturn.
"What was Martin's hobby? Work," says Leon Cooperman, the billionaire hedge-fund investor and longtime friend of the Bucksbaum family.
Matthew, now 82 and retired, is more shy and has more outside interests than his brother. He and his wife, Kay, are avid art collectors and music supporters. Their condo on the 70th floor of a luxury high-rise in downtown Chicago is filled with modern art and hand-crafted furniture. At their stone-and-timber vacation compound in Aspen, Colo., on Red Mountain and assessed by county officials at $20 million, the Bucksbaums frequently host dinners for famous musicians like cellist Yo-Yo Ma and violinist Joshua Bell. Their annual New Year's party has become one of Aspen's most coveted invites, attracting Madeleine Albright and other dignitaries.
General Growth's debt troubles date back to the mid-1990s, when Martin's health began to weaken. The family had been conservative managers, building the dominant shopping venues in secondary and tertiary towns like Bettendorf, Iowa, Hutchinson, Kan., and Fayetteville, Ark.
But after emerging in 1993 for a second stint as a public company, the Bucksbaums decided to grow through acquisitions.
In 1994, General Growth bought a 40% stake in CenterMark Properties, which owned 16 regional malls in major cities such as Los Angeles and Washington. A year later, it nearly doubled its size, teaming with four investment partners to buy Sears, Roebuck & Co.'s Homart development division to take over 40 malls. Martin Bucksbaum died, at 74, as the Homart deal was being completed.
Matthew, president at the time, was then named CEO and chairman. There were no other candidates considered for the job, since he and Martin were such a close team, board members say. Matthew moved the company headquarters to Chicago.
He also groomed his son, John Bucksbaum, to take the company's helm. Reserved, solitary and competitive in and out of the office, John Bucksbaum, now 52, is a dedicated mogul skier and cyclist. He logs thousands of miles each year on his bike, sometimes riding with Lance Armstrong. In 1999, Matthew and the board named John as CEO and, once again, there were no competing candidates.
"John was extremely well-trained by both his father and uncle," says Mr. Mark, who was a board member during the transition. "It was a natural evolution for a family-controlled business."
Yet John proved to be a different kind of manager than his late uncle. Like his father, he focused more on General Growth's internal operations, leaving many aspects of finance and acquisitions mostly to his lieutenants, primarily chief financial officer Bernie Freibaum. It was a role that for decades had been played by Martin.
A lawyer and CPA known for his hardball negotiating tactics, Mr. Freibaum, now 56, became the company's finance architect. His tenure coincided with a broader shift in the way some real-estate companies were financing their operations. Rather than apply for bank loans, General Growth began taking out short-term mortgages on its malls. As the mortgages came due, the company would replace them with even larger mortgages to provide cash for additional acquisitions.
The strategy picked up steam with the emergence of new debt-trading markets. In the mid-1990s, lenders started slicing up commercial mortgages and selling them to multiple investors as bonds. The boom in trading made mortgage-backed debt much cheaper and more plentiful -- as long as investors were willing to buy.
General Growth was soon at the forefront of this market. And because the company was borrowing mostly against its individual properties, lenders didn't place restrictions on its overall debt load, allowing it to accumulate more and more debt.
General Growth's ratio of its debt as a percentage of its asset value has soared to 83%, compared to 63% for mall owner Macerich Co., 54% for Simon Property and 48% for Taubman Centers, according to Green Street Advisors.
"We never had any more leverage than we thought was necessary," Mr. Freibaum said in an interview last March. "It just so happens that the biggest names in the mall sector had a different strategy."
In August 2004, General Growth made its biggest acquisition to date: $12 billion for Rouse Co. Rouse owned three dozen upscale malls in the Midwest and Northeast, including Chicago's Water Tower Place, Boston's Faneuil Hall and Columbia, Md.'s Columbia Town Center. The deal instantly transformed General Growth from a small-town, industry stalwart to one of the leading lights of marquee retailing.
It also marked a turning point in General Growth's fortunes, more than doubling its debt load to $20 billion. Most of the borrowing was backed through mortgages rather than more traditional corporate borrowings.
The company inherited an unusual obligation from Rouse. In buying thousands of acres outside of Las Vegas from the Howard Hughes estate in 1994, Rouse had negotiated to pay half the appraised value of the land in early 2010. With that bill soon coming due, General Growth as Rouse's successor faces paying several dozen Hughes heirs, scattered around the country, up to $1 billion in cash or stock. Even if the appraised value of the land falls, the company could still owe millions, according to analysts' estimates.
“We have great assets, great employees. Our issues are not with the operations of these properties, it's with the balance sheet. We'll be able to restore the value that these properties hold.” John Bucksbaum
After the Rouse deal, John Bucksbaum and Mr. Freibaum made other acquisitions, including buying out General Growth's partners in the Homart malls for $2 billion last year, pushing the company's debt load to more than $27 billion.
That didn't appear to be a problem until August 2007, when the credit markets froze on concerns about subprime mortgages. The commercial-mortgage market that General Growth relied on essentially vanished. Unable to refinance mortgages, Mr. Freibaum spoke publicly about selling stakes in several malls, but he didn't strike a deal. By September 2008, the stock was down 60% from its 2007 high of $67 a share.
The stock plunge set off a second crisis: Top executives had to dump millions of their General Growth shares to cover margin calls. Many executives had borrowed heavily to buy General Growth stock. Mr. Freibaum bought 7.6 million shares -- more than 3% of General Growth's total -- mostly on margin.
The Bucksbaum family's trust loaned Mr. Freibaum $90 million and President and Chief Operating Officer Bob Michaels $10 million to meet the margin requirements without dumping stock. Any executive sale of stocks would have had to be publicly disclosed, which could have spooked investors and led to more selloffs. The board said it had no knowledge of the loans.
Yet by August and September, the stock had fallen so far that General Growth executives couldn't avoid selling roughly 8.5 million shares to cover margin calls. By early October, the board's patience with Mr. Freibaum had run out, and it voted to dismiss him.
It wasn't until later that month that the board heard rumors about the Bucksbaum trust's loans and confronted John Bucksbaum, who acknowledged the loans, according to people familiar with the matter. While not illegal, the loans violated company policy, since they could pose a conflict of interest. Mr. Bucksbaum, for instance, might be less likely to discipline or fire Mr. Freibaum or Mr. Michaels because of their financial ties.
Following a weeklong investigation by Chicago law firm Winston & Strawn LLP, board members Adam Metz and Thomas Nolan, both commercial-real-estate veterans, went to Mr. Bucksbaum's office and told him the board would seek his resignation.
Mr. Bucksbaum remains chairman, but Mr. Metz now serves as interim CEO, the first nonfamily member to hold the post. Mr. Nolan became president, replacing Mr. Michaels, who remains operations chief. Mr. Michaels, who repaid his loan, didn't return calls seeking comment.
During the board talks, Mr. Bucksbaum said there was no ill intent by the family trust in making the loans. But he said he had made an error in judgment in not informing the board, according to people familiar with the matter.
In an interview, John Bucksbaum said he remains "very involved" at General Growth and his removal as CEO was a mutual decision.
The Bucksbaums, meanwhile, have seen their personal fortunes fall with the company's. According to friends, Matthew and Kay have decided to cancel their annual holiday party in Aspen.
