Lehman's McAllister "Ranch"

If you want to see what's wrong with Lehman Brothers, the investment bank with a storied name but a troubled present, you need to leave the canyons of Wall Street and head to the flatlands of exurban Bakersfield, Calif., some 120 miles northeast of Los Angeles. That's where you find McAllister Ranch, envisioned as a 6,000-home, multibillion-dollar recreational community.

As you approach the "ranch" after a nearly two-hour drive from L.A., you come across an expanse of rough scrub dotted with tumbleweed, intermittent oil derricks and the odd skittering rodent. You pass a billboard -- "opening soon" -- pitching new homes built around a Greg Norman-designed golf course and promising boating, fishing and a beach club. Finally, you make it to McAllister: 2,070 fenced-in acres, which is more than three square miles. Look past the fence -- you're not allowed inside -- and you see a half-finished clubhouse and a golf course gone to weeds. You don't see any happy homeowners, who were supposed to have started moving in two years ago. You don't even see any homes. All you see is an almost-lunar landscape with no construction going on. So far, this development alone -- part of a major bet on Southern California's Inland Empire -- has cost Lehman $350 million. None of Lehman's peers, such as Merrill Lynch and Morgan Stanley, has this kind of exposure...

For now, let's talk a bit more about McAllister Ranch and how it symbolizes Lehman's problems. First, Lehman's commercial paper unit is on the hook for a $235 million loan it made to the development. Good luck trying to collect that debt. Worse, in 2006 -- the height of the housing bubble -- Lehman invested a total of $2 billion in deals with McAllister's developer, SunCal, a Southern California firm severely spattered by the bursting of the real estate bubble. The $350 million McAllister loss looks increasingly like only a down payment...

But this time, we suspect, that because of pressures we foresee both from the capital markets and regulators, Lehman will ultimately end up owned, once again, by a much larger institution. So let's close by going back to where we started: McAllister Ranch. When we tried to get a tour of the property, a man in a Hawaiian shirt and shorts, who clearly isn't an investment banker, emerged from deep inside the development's darkened sales office. His final words as he shooed us off: "This is not a public business." Which may be said of Lehman soon.
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