Why General Growth Failed

--Rather than apply for bank loans, General Growth began taking out short-term mortgages on its malls. 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. --Acquisition: 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 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 Washington, D.C.'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. --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.