Consider General Growth Properties, a company whose name may not ring any bells but whose real estate holdings have touched us all, sometimes in the no-no parts.  Above is their stock chart, as of this morning, and please note the precipitous drop over the past six months.  What traded for forty dollars a share in June was in November trading for forty cents.  The failboat is too good for GGP; this warrants the dreaded failcarrier:

So who is this GGP that we all know but have never heard of?  GGP owns malls.  A lot of malls.  If you’ve ever been in a mall that’s neither a dirt mall nor a high-end fancy mall with valet service, but rather a mall you might go to when you need to kill a couple of hours and which elicits only a reaction of “Hm” from you, you have been in a GGP mall.  The kind of mall where the nicest store might be a Banana Republic, or that would house an Old Navy flagship store.  And now they are facing a likely Chapter 11 filing by the end of this week.

Unless, that is, it can cough up $900m for a loan payment by Friday.  No problem, right?

The company’s CEO, John Bucksbaum, was recently given the boot from that position (retaining the title of chairman) thanks in large part to his giving loans to two company officers without first informing the rest of the board, which I guess is a firin’ offense.  The way things are going at GGP, he’ll be lucky to keep his family name on the letterhead at all.

When John was named CEO in 1999, succeeding his father Matthew (a co-founder of the company), he came on with visions of growth glittering in his beady eyes – and not so much the whole finance…thing…that his uncle (Martin, the other co-founder) was so heavily into and which had marked much of the company’s success heretofar.  He turned the financials over to Some Dude, CFO Bernie Freibaum, a man seemingly set on disproving the stereotype that Jews are handy with money.

When a company needs quick cash to fund expansion or whatnot, it has a few options.  It can either take itself public, issue more stock if it is already public, actively seek investors in exchange for preferred stock, rent its genitals by the hour on a downtown street corner, or just get a loan from a bank.  Taking out mortgages on its own properties, especially when that company is real-estate focused, is generally much further down the list.  Paying back those mortgages with even larger mortgages, on other properties, tends to be near the bottom of the list, because it is a really stupid idea.  Since you’re reading this on LOLFed, you might have already guessed which path GGP took.

Funny thing about mortgaging individual properties: when you have as many as GGP does, lenders don’t really place limits on just how many mortgages you can take out, either because you don’t tell them how many others you already hold, or because the lenders just assume that no company would be dumb enough to do what GGP did.  Long story short, the company now has debt of well over $20b (yes, that’s billion) hovering over its head, and oh, they’re finding themselves unable to pay it back, what with the commercial mortgage market all but drying up with the rest of the mortgage market last year.  The company’s debt now equals 83% of its total asset value.

For what nefarious purpose could all these mortgages be used?  Why, acquiring other mall-owning companies, of course.  Half of that debt was accumulated in the takeover of The Rouse Co., and with that came an odd requirement.  The Rouse Co. had earlier taken over the Howard Hughes Corporation, including all of its land holdings.  As part of the deal to buy Rouse, GGP had agreed to pay half the appraised value of that land to Hughes’ heirs.  That land?  Thousands and thousands of acres outside Las Vegas.  So GGP is on the hook for close to $1b in those reimbursements alone.

As could be expected, when all of this began to unravel, GGP’s stock began to drop.  CFO Freibaum, as well as COO Bob Michaels, had wisely purchased many, many millions of dollars’ worth of GGP stock on margin, which did not work out so well for them after all.  This is where I get lost.  Freibaum was in charge of the company’s money, and had been moving it around and borrowing it like it was being printed in ways that were quite frankly unsustainable, and then bought seven and a half million shares of stock in that same company, in a method that he had to have known was going to have him on the hook for millions of dollars to cover margin calls when his money mismanagement scheme blew up in his face.

Remember the loans to company officers?  One was to Michaels, for $10m, and the other to Freibaum, for $90m, to cover their margin calls so they wouldn’t have to dump their stock, which would have spooked investors even more.  Then the stock continued to plummet and they had to sell off over eight million shares anyway.  Freibaum was canned by October, and once word of the loans leaked out, Bucksbaum was out as well.

The Bucksbaum family, which collectively holds 25% of the company, has seen its stake’s worth plunge from $3b in June (the left side of the above chart) to just over $100m.  In the event of a Chapter 11 filing, the chances of the family’s stake being eliminated almost entirely are fairly even.  But don’t worry, they won’t be reduced to shopping in Old Navy flagships anytime soon.