Bradford & Bingley did not demutualise, which is what the British call going public, until December 2000. Just eight short years later, with the credit crisis casting a pall over the European economy, the company was nationalized on Monday, September 29, 2008.

Mortgage lender Bradford & Bingley confirmed Monday it is to become the second bank nationalized by the British government since the financial crisis began.

In a deal hammered out with Spanish bank Santander, B&B was being taken into public ownership after uncertainty over its future prompted savers to withdraw “tens of millions of pounds.”

British Finance Minister Alistair Darling said B&B assets were sold to Santander’s Abbey division for just over £600 million pounds, or about $1.1 billion.

So, over the course of one weekend, more than 150 years of toil and profit were rolled up into a tidy little package, but to find the beginning of the end we must go back to the beginning of the new century and credit bubble.

It was then that chief executive Christopher Rodrigues rid the company of pomposity and the bank paid more than £1,000 for Stan Laurel’s bowler, which went on display at the head office.

The purchase was a witty, if expensive, nod to its corporate logo: two City gents sporting pinstripes and bowlers. The fictional Mr Bradford and Mr Bingley, appeared on television adverts for the bank from the 1970s, exuding an air of conservative financial solidity – underlying B&B’s position as Britain’s second biggest building society, founded in 1851 to build a better future for the people of northern mill towns.

But it was the new CEO Steven Crawshaw, who put the the company on the road to ruin by personally overseeing the demutualization even though it was resisted.

At the time the move was strongly resisted by many on the lender’s board of directors, including Rodrigues himself, but it was pushed for by many of its members. He argued it could continue to expand while remaining free from the stock exchange.

But the promise of a windfall of at least £1,000 was too much for many of its members. Customers received a minimum of 250 free shares at the flotation price of 247p when the shares started trading in 2000.

It was Mr Rodrigues’ successor Steven Crawshaw that was responsible for changing the nature of those customers.

Apparently, if Crawshaw couldn’t change the nature of those customers, then £1,000 and 250 free shares at 247p piece certainly could.

Thus the demutualization transformed the building society into a British Countrywide Financial where reckless leveraging and disregard for future consequences could dominate.

Traditionally, building societies relied on their savers to fund their mortgage business. For each £1 deposited, they would lend out £1 and make a profit on charging more to their borrowers than they offered to their savers.

But B&B, like many aggressive de-mutalised building societies turned to the international money markets to allow it to lend ever greater sums of money. It now has £22 billion of savers’ deposits but nearly double that in mortgages – £41 billion.

B&B was so keen to increase the number of mortgages it owned, that it hoovered up “specialist” loans from rivals, buying up its Kensington mortgage company as recently as last year, when some commentators were already starting to warn the UK housing market was unsustainable.

But the bubble burst faster than it expanded and Bradford & Bingley launched a £400M rights issue which was not well subscribed. This left much of the issue with underwriters, and when TPG Capital, who had previously agreed to take a 23 percent stake in the company, withdrew their support, B&B was finally doomed.

The Cutting of 350 jobs was not nearly enough to save the company, and so with options and time running out, the British government moved in and nationalized the bank.

In the aftermath, the financial media fretted over who would keep the bowler hat. Witness the outrage we must call reporting:

“The bowler hat is used for general products, mortgages and investments, so it covers both sides of the business,” says Ms Ramage, of Alexander Ramage Associates.

What it’s now worth is not clear. “It’s almost impossible to put a value on it because it’s tied up so implicitly with the assets of the business. At some point an accountant will have to sit down and say what’s it’s worth.”

How about the price of dinner for former employees searching for the breadline? Witness again:

FURIOUS critics hit out last night as the Government gambled the equivalent of £1322 for every UK taxpayer on nationalising the Bradford & Bingley.

A statement will be issued to the Stock Exchange today on Gordon Brown’s rescue plans amid fears for the UK financial system.

But there was growing anger from taxpayers’ groups and shareholders that the Government will take responsibility for “toxic debts” among the bank’s £40billion mortgage book. If property prices continue to fall and repossessions rise, taxpayers will have to pick up the bill.

It’s safe to assume that property prices will continue to fall and repossessions will rise. It’s a safe bet that taxpayers will have to pick up the bill.

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With write-downs and losses piling up and no possible means of generating earnings to fight back, National City Corp took an offer from the Treasury czar that it could not refuse. The bank has agreed to sell itself to PNC. And the price?? Chump change compared to what is was just two short years ago. <>

2008-10-21 -Q3 :

Here’s the tally thus far:

1. Write-Downs/Charge-Offs: $940M + $844M = $1.784M
2. Cash Raised: $9B + $0B = $9B
3. Level III Assets: $?B
4. Loan Loss Reserves: $1.18B

We now sum all the distresses to get National City’s current Misery Index of $14.9B + $12.0B = $26.9B

2008-10-09 – Up for Sale?:

National City Corp stock was up today on talk of a buyout, and that is the best news out there for the ailing regional bank.

2008-09-04 – H.E.L.O.C::

Freezing home equity lines of credit is another way of saying “buying them back.” Rather than freezing its customers’ HELOCs, National City is simply waving the $350 fee. Hey, an uncharged fee is also known in some circles as a payout.

2008-07-24 – Reality Strikes Q2:

National City’s Disney Land approach to financial reporting ran into the brick wall of reality as the bank reported its fourth consecutive loss at nearly $2B. The losses came neatly packaged with an increase in loan loss provisions to $1.6B from $145M in the second quarter of last year. Net charge-offs also jumped to $740M as the company raised an additional $7B in cash on top of the $2B it has already raised. The loan loss reserves increased ten fold to $1.69B from $145M. With $940M already written down so far and $3.3B of Level 3 remaining, you can see there’s a lot more on the way. That’s what the ten fold increase in loan loss reserves is all about. Here’s the tally thus far:

1. Write-Downs/Charge-Offs: $200M + $740M = $ 940M
2. Cash Raised: $2B + $7B = $9B
3. Level III Assets: $3.3B
4. Loan Loss Reserves: $1.69B

We now sum all the distresses to get National City’s current Misery Index of $14.94B

2008-07-14 – Denial:

It has been ably demonstrated by Northern Rock, Bear Stearns, CountryWide, Lehman Brothers, Merrill Lynch, Fannie Mae and Freddie Mac that denials of liquidity problems are a sure sign of just that: big time problems. Now National City proves it for themselves.

2008-06-06 – On Probation:

National City’s dead man stumbling has drawn the attention of federal regulators who are telling the bank to straighten up.

2008-04-21 – Dead Man Stumbling:

We said that it would take a lot more (money that is) to get National City off death watch, and a lot more is what the bank might get:

National City Corp., Ohio’s biggest bank and subprime lender, may get $6 billion to $7 billion from a group led by Corsair Capital LLC to bolster its balance sheet, said a person with knowledge of the situation.

2008-03-25:

It is going to take a lot more than the $530M bandaid gained on the VISA IPO to remove National City from death row’s watch. For the tenth largest US bank by deposits, that won’t even cover the $700M it expects to set aside in the fourth quarter to cover bad loans, let alone the $200M charge related to the declining value of mortgage securities.

In the bank’s 2007 annual report, new CEO Peter Raskin stated:

As you know, 2007 turned out to be a very difficult year for National City. Severe disruption in the mortgage, housing and credit markets that developed throughout the second half of the year led to significant losses in our mortgage business, which dramatically weakened results for the company overall.

While it’s true that the weakened housing and credit markets made the most dramatic impact on National City in 2007, the crime for which it now faces the gallows was committed in 1999. That’s when former chief executive David Daberko changed the bank’s business mix by accumulating higher-yielding, but riskier, loans (most notably subprime mortgage loans). 1999 is the year National City bought the original sin of subprime originators: First Franklin Financial. Witness:

Rather than issuing mortgages and selling them off to investors, National City began in 2000 to hold a portion of its First Franklin loans in its loan portfolio. A big portion.

Mr. Daberko explained the strategy in a letter to shareholders in 2001: “These loans are readily salable to third parties at a premium to origination cost but have greater lifetime value when held on the balance sheet.”

At the time, the strategy was clicking.

It’s not so much that the strategy was clicking as it was that money was cheap — too cheap to last. So, as the Fed raised interest rates in 2005, National City’s profits plummeted under the avalanche of mortgage defaults and a crashing housing market. As the subprime scam was literally coming apart at the seams, National City was unwilling to admit guilt and unable to respond:

National City retained more than half of the $10.7 billion in loans First Franklin originated in 2002.

Still, he (Daberko) insisted mortgages “are an essential core banking product” at National City and stated, “We plan to be well positioned when conditions in the mortgage market improve, as they inevitably will.”

The first admission of guilt came more as an entrapment than a confession with National City selling First Franklin to Merrill Lynch on Dec. 30, 2006.

The subprime way turned out to be a one-way dead-end street from which there was no turning back, except ironically for the man who began it all, former CEO David Daberko. Mr. Daberko was able to get out (he retired); National City was not, and perhaps it’s not so ironic after all. But toward the shadow of the gallows, it’s not Daberko who’s the dead man walking, be it by bankruptcy or buyout or bailout. When the hangman’s gloomy voice calls, it is National City which takes a step closer.

2008-12-31 2008 – Imploded:

Merrill Lynch has not been bailed out, bought up or kept around for any other reason than to pay Thain’s bouns. The bank exists in name only so, going into 2009 we will drop the pretense and imploed it.

2008-10-18 Q3 – Final Report:

Merrill Lynch reported Q3 results and they were the same for the fourth straight time. Another loss! This time the loss comes on a whopping $9.5 billion in write-downs.

the total comes to:

1. Tally for Write-Downs/Charge-Offs: $47.25B + $9.5B = $56.75B
2. Tally for cash raised : $34.4B + $14.225B = $48.625B
3. TARP: $10.0B
4. Current level of Level III assets at $*B
5. Current level of loan loss reserves at $*

Misery Index > $115.375B

2008-09-15 Curtains:

Merrill Lynch no longer exists as an independent entity. It lost that status over the weekend when it was bought out by Bank of America. But even as it was dying, the company could not resist pulling off one last scam. <>

2008-08-25 Robin Hooded:

Merrill Lynch has been forced to cough up cash to repurchase some of its own junk, specifically the auction rate securities. They have agreed to a $125 million fine and to repurchase $10 billion to $12B from State of Massachusetts investors and separately $7B via the SEC. The agreements with New York, Massachusetts and the SEC are each seperate, but some of the investors covered by the SEC are also covered by New York or Massachusetts or both so the most Merrill will repurchase under all three agreements is $12B.

2008-07-29 It’s Still Not Over:

In order to beat the street, Merrill Lynch soft balled its second quarter write-downs. Now they have to cough up the remainder before third quarter reporting.

2008-07-17 It’s Still Not Over:

It’s not over til it’s over, but it’s just not ending for Merrill Lynch. Level 3 is rising, and the write-downs keep cascading in on top of the $37.5B already written-downs. The company apparently does not report its loan loss provisions or has another name for it, so for now we estimate that the Misery Index has gone up $18B since last summer. Combined with the new write-down tally, the total comes to:

1. Tally for Write-Downs/Charge-Offs: $37.5B + $9.75B = $47.25B
2. Tally for cash raised: $34.4B
3. Current level of Level III assets at $69.86B
4. Current level of loan loss reserves at $*

Misery Index > $83.5B

2008-07-11 Level 3:

Merrill Lynch has almost no shareholder equity. It has been almost entirely contaminated by toxic Level 3 trash:

Merrill has $61.7 bn cash and equivalents on its balance sheet, it has $36.5 bn in shareholder equity, but it has $34.4 bn in illiquid level 3 trades, both assets and liabilities that it can’t get a pricetag on because no one wants these items. It’s got $9 bn in toxic subprime collateralized debt obligations, those cut and paste jobs few can make any sense of, with another $4.6 bn in asset-backed securities propped up by corporate bonds and loans. It’s got $44 bn in exposures to residential mortgages as well.

This helps us put Merrill’s level 3 balance into some perspective. Shareholder equity = $36.5B, but only $2.1B is real. In other words if they wanted to sell it all tomorrow only $2.1B would even have a market. In the real non-SFAS No. 157-world, shareholder equity is only a fraction of what it’s reported to be.

2008-07-02 Cut Down Again:

Merrill Lynch is cut down again by Meredith Whitney of Oppenheimer and UBS analyst Glenn Schorr.

2008-06-27 Cut Down Again:

Merrill Lynch has been quite busy this week. After receiving downgrades and retreating from Australia, it happened to come up that the bank still believes the direct pipeline to politicians’ pockets is the superior business model. The upshot is that the write-downs for the sacond quarter could go as high as $5.4B.

2008-06-02 Cut Down:

Merrill Lynch, the third-biggest U.S. securities firm by market value, was cut to A from A+ by S&P today in a move that may foretell of more serious write-downs and credit-related losses to come.

2008-05-22 Write Downs Count of a Different Sort:

We have been keeping a running tally of write-downs and other credit-related distress taken by the major banks since 2007. But here comes a write-down count of a different sort, how much in write-downs and credit losses firms have written off per wholesale banking employee.

Merrill Lynch – $31.7B, 48,100 employees, $659,044 per employee

2008-05-21 – Leaving London:

It is probability the best thing the bank could do, maybe the only thing, but now there is one less subprime lender in the UK. In fact, all the banks including Merrill Lynch have severely limited credit flow to all borrowers. This is how a contagion spreads

2008-05-19 – Off Balance:

Banks are not writing down their write-downs and getting away with it. Instead, they are writing them down in the balance sheet, and there is a distinction.

Merrill Lynch was hiding $5.3 billion on the balance sheet, but we will balance things out for them by adding $5.3 billion to their existing $32.2 total bringing them up to $37.5 billion.

2008-05-14 – Sisyphus and Leveraged Loans:

In the hey-day of the credit bubble and the carry trade Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers took in mountains of money making loans for leveraged buy outs. Banks make money by lending money so fewer loans usually looks like less profits. But in the topsy-turvy aftermath of the credit bubble, when all loans are suspect and leverage loans among the most toxic, banks are trying to rein in their balance sheets.

That’s why the cancellation of Cumulus Media’s $1.3 billion buyout looks like good news for Merrill Lynch’s heavy loan book. Already Merrill has reduced its corporate loan book by 20%.

Merrill Lynch still has $14 billion exposure to high-risk loans.

2008-05-08 - Sleight of Hand:

Minyanville reports that Merrill’s level three assets have ballooned to 225% of shareholder equity. Problem solved, or sword of Damocles?

2008-05-06 – The New Default Swap:

Merrill Lynch is swapping the mortgage-backed assets in danger of default into its level 3 accounting column. The increase in level 3 liabilities from Q4 of 2007 to Q1 of 2008 amounted to $17.7 billion, an increase of nearly 70 percent.

2008-04-17 - Caught:

Merrill Lynch and CEO John Thain sought to get out in front by playing fast and loose with reckless disregard for other people’s money and today those other people saw that risk catch up:

Merrill Lynch & Co. posted its third straight quarterly loss and said it will cut about 3,000 more jobs after the credit seizure forced the investment bank to write down at least $6.5 billion of debt.

For the fiscal first quarter 2008, Merrill wrote down $6.6 billion to CDOs and another $3.1 billion to the plummeting value of mortgage-related securities on hold at its U.S. banks, giving a total of $9.7 billion written down so far this year.

In the bigger picture, the company has written down $18 billion on CDOs alone in the past nine months, and has also
written off about $29 billion worth of risky asset-backed securities and leveraged loans.

The reality for Merrill Lynch is as it was for Bear Stearns–STARK. John Thain was hired as chief executive four months ago, but not to save the company. For a major bank that rose to the top on Ponzi finance and now knows no other finance system, the end of days of Ponzi finance bring no salvation. No, it is more likely that Thain’s purpose is “to hit one out of the park.” That best explains the psychotic frenzy of risky double-down dealing that Thain has engaged his company in since his arrival. It is a low-probability desperate attempt to squeeze a few cents out of each share for the cadre of elite insiders, ala Bear Stearns, but it is no rescue, you can be sure of that. In fact you may as well chalk Merrill up as ailing, or better yet get a new category –Dead Man Walkin’.

2008-04-16 – Caution to the Wind:

Merrill Lynch is due on Thursday to report first quarter earnings along with mortgage securities write-offs of another $6 billion to $8 billion. Perhaps it would be more appropriate to have Merrill, Thain and company explain themselves, but don’t count on it.

2008-03-26:

Don’t look now, but Bloomberg reports in a long article on credit lines that Merrill has about $59.3 billion of undrawn credit line commitments (or at least, did at year-end 2007. For comparison, however, Citigroup had $471B and JP Morgan had $251B). This is much worse a fact than it would seem in isolation, since now more than at any other time in living memory, corporate borrowers need to draw down those credit lines (which is the main point of the article).

Money center banks collectively have $1.4 trillion of untapped credit commitments. We don’t think they have $1.4 trillion of capital, however.

2008-03-19:

We can add it now or add it later, but we will add it because (from Mish):

Let’s face the facts. When you file a $3.1 billion lawsuit against someone who is insolvent, you can all but kiss $3.1 billion goodbye.

Merrill Lynch is not going to collect a dime from this lawsuit for the simple reason the guarantee of XL Capital Assurance Inc. is likely worthless.

Say so long to another $3.1 billion.

2008-02-21:

Merrill Lynch has been pegged by Oppenheimer analyst Meredith Whitney for an estimated $19B more in write-downs due to leveraged loans. There is probably more to come.

2008-02-04:

Merrill (along with UBS) is in trouble with a veritable hornets nest of suddenly-angry regulators:

The SEC, deepening its own set of investigations into whether Wall Street firms improperly mispriced mortgage securities, recently upgraded probes of UBS and Merrill Lynch & Co. into formal investigations, people familiar with the matter say.

…

The investigations could raise the stakes for Wall Street in the multiple probes examining whether financial firms deliberately misvalued, or “mismarked,” massive holdings of mortgage securities. Most of the current investigations into mortgage matters involve civil authorities; the U.S. attorney launches criminal investigations and has a history of prosecuting Wall Street-related matters.

…

Other regulators led by the SEC are examining whether financial firms should have told investors earlier about the declining value of such securities and how they priced them on their books, people close to the matter say.

In its investigations, the SEC also is delving into whether Wall Street firms placed higher values on securities they own than those they placed in customer holdings, the people say. The SEC previously has said it has opened roughly three dozen investigations tied to the downturn of the subprime market, which primarily is tied to borrowers with poor credit histories.

We hope you kept your noses clean, boyz.

Initial Writeup, Feb. 3, 2008:

Merrill Lynch has been one of the hardest-hit banks by the credit crunch and subprime debacle. As per their Q-4 2007 report, the bank wrote down about $7.9B in the third quarter and a whopping $11.5B in the fourth quarter — an amount “bested” only by UBS. There was also $310M written down due to the collapse of bond insurer ACA Capital. This brings the total loss in these areas for 2007 (as reported so far) to almost $20B.

The bank reports a continuing $4.8B exposure to subprime CDOs, over $43B of held subprime RMBS, $1.6B of direct subprime loans, $13.8B in subprime-linked CDS, and $1.6B of exposure to ACA remaining. Suffice it to say, we expect more write-downs to come out of these exposures.

Also worth noting is a general $23B of derivatives exposure to counterparties with “AA”-or-lower ratings. That represents 70% of Merrill’s tangible equity. This could turn out to be a huge source of future earnings risk for the bank.

By way of review, Merrill was one of the top pushers of subprime product in the frenzy of the past few years, even purchasing major nationwide subprime lender First Franklin in late 2006 in an attempt to have more of the bonanza of profits for itself. That purchase turns out to have been ill-fated, as the company’s post on the Mortgage Lender Implode-o-Meter thoroughly illustrates. Volume is now essentially non-existant.

Merrill jettisoned its CEO Stan O’Neal to pay for the company’s subprime sins (this apparently had nothing to do with “punishing” O’Neal — who received a $160M golden parachute on his way out). However, all indications are that there will be much more purgatory to pay. For example, as Mish reports, Merrill is having to take back some of the junk they dealt, especially that which was sold to public entities. Mish argues (and we agree) that this action may start a trend, not just at Merrill but any other banks that put out similar product, and especially as municipalities find themselves effectively broke.

And that means there’s a lot more “off-balance-sheet exposure” lurking.

Glitnir Bank hf, Landsbanki Island hf and Kaupthing are unable to finance about US$61-billion of debt, 12 times the size of the economy, according to data compiled by Bloomberg. Their collapse has affected 420,000 British and Dutch customers, and frozen assets held by universities, hospitals, councils and even London’s police force. The government is seeking a loan from Russia and may ask for aid from the International Monetary Fund to help guarantee deposits.

That action led to the three day closing of Iceland’s stock market and an ensuing 77 percent cliff dive on reopening. Now it poses a threat to CDO’s, which insure the banks’ solvency.

Iceland’s collapsed banks pose a “substantial” risk to collateralized debt obligations that made bets on corporate debt, according to Standard & Poor’s.

And has caused spreads on credit default swaps to soar:

The cost of hedging against default by the Icelandic government has soared to 948 basis points, according to CMA Datavision prices for credit-default swaps. That means it costs 948,000 euros a year to insure 10 million euros of debt for five years. It compares with 118 basis points for the Czech Republic and 238 basis points for Morocco.

European governments can freeze all bank assets, but will never make whole what has been lost. That presumably is the motivation to work with Landsbanki Islands and Iceland’s other ailing banks.

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The cost of insuring against a default by Iceland’s government and the three banks has surged to a record, credit- default swaps show. Glitnir, Kaupthing Bank hf and Landsbanki Islands hf have the worst creditworthiness among European lenders, according to the swaps.

“The focus now is clearly on Iceland as a country risk,” said Mikko Ayub, Helsinki-based head of investment product sales at Nordea Bank AB.

That action led to the three day closing of Iceland’s stock market, and an ensuing 77 percent cliff dive on reopening. But the weight of the government’s full faith and credit is not nearly enough to restore investor confidence. Instead, Iceland must now either beg for relief or become isolated.

Under a currency swap agreement, Iceland on Tuesday, Oct. 14, secured 200 million euros ($270 million) from each of the central banks in neighboring Norway and Denmark, but talks to secure a much larger loan from Russia continued. Icelandic officials arrived in Moscow on Tuesday for talks, though Geir Haarde, Iceland’s prime minister said the size of any loan from Russia had not been decided.

The implosion of Iceland’s largest banks has forced the government’s hand while weakening its bargaining position. This is the worst of both worlds; British and Russian bankers are on the way.

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The government said it bought a 75 percent stake in Glitnir, the country’s third largest bank, for 600 million euros ($878 million) to ensure broader market stability after it suffered liquidity issues.

Central Bank of Iceland chairman David Oddsson said that Glitnir, which has operations in 10 countries, would have collapsed if the authorities had not intervened.

The government said that the bank would continue to operate as normal and that it does not intend to hold its share “for an extended period.”

The government has stressed that this is business as usual, and that the bank will not default:

Iceland’s Prime Minister Geir Haarde said the country won’t default on its state debt even after the financial system failed and the currency collapsed.

“Of course the Republic of Iceland is not in default,” Haarde said in an interview with Bloomberg television in Reykjavik today. “It will never be in default, I can assure people of that.”

But the implosion of Iceland’s third largest bank by deposits is not an isolated event. It is part and parcel to the collective collapse of three banks whose collective liabilities exceed Iceland’s GDP. A bailout will place monumental strain on the small island’s government.

Haarde today declined to give details of how the government plans to deal with about $61 billion of debt in the three lenders, Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf, taken over by the regulator last week.

“Whether there will be defaults on some of the debt remains to be seen,” he said. “But the government as such will of course honor all its obligations.”

According to Portes, Iceland needs to “throw” itself “at the mercy” of the Washington-based fund as soon as possible.

An Icelandic delegation started talks in Moscow today to secure an emergency loan of as much as 4 billion euros ($5.47 billion) from Russia. The talks are expected to last a number of days, an official at Russia’s finance ministry said today.

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Once the king of European banks, the Royal Bank of Scotland finally ran out of credit and crashed over the weekend. The bank had been burning white hot profits from leveraged loan buyouts and acquisitions of enormous scale.

The speed of the RBS rescue plan underlines the depth of concern in official circles over the Edinburgh group’s finances.

Fears that RBS (down 31p to 65p) could run out of cash if wholesale lending markets remain shut have wiped over £30billion off the bank’s shares this week alone.

The government will get 60 percent of the bank in return for $35B, which we will consider as cash raised.

The bank survived revolutions, the Great Depression, and two world wars, but finally succumbed to the credit crunch. The banks current and final CEO, Fred Goodwin, reined in an age when competition is sin and self centered greed is virtuous.

Can one even wonder why Goodwin began a frantic hunt for the leveraged loan buyouts and subprime-backed loan portfolios as the credit bubble expanded? He spent almost $90B on takeovers since he became CEO in 2000.

Fred Goodwin became Europe’s highest profile casualty of the credit crunch after striking a deal too many at Royal Bank of Scotland

RBS was on Monday forced to get 20 billion pounds ($34.5 billion) in emergency funds. Chief Executive Goodwin stepped down, and Chairman Tom McKillop will follow next year.

Goodwin, a steely Scot, was the longest serving boss of a UK bank after becoming chief executive in 2000, but paid the price for his ill-timed takeover of parts of ABN AMRO last year.

Well, it’s more like “after striking as many deals as he could.” After all, the new capitalist model is to burn the flares at both ends while taking as much as you can and leaving the bank to crash.

Goodwin told you so himself when he said he “had to go some time.” Going is what usually happens to a CEO after a second fund raising. It would be nice to think that being forced out was the price he paid for his ill-timed takeover of parts of ABN AMRO last year, but the reality is that he was paid the price for the ill-timed acquisition. We mentioned this before.

The buy out of ABN was a botch to begin with, it made no sense except to the ones directly involved with the fees, royalties and sundry of other payoffs and kick backs, all quite legal if not proper I assure you. Show me the directors and insiders who benefited from them and I’ll show you who’s protecting Goodwin. But Mr. Goodwin well knows that a CEO is just the right rank for a patsy, high enough to quench blood thirst of angry shareholders and draw the attention of investigators, while low enough to give up with out skipping a beat.

Goodwin’s dream was to take as much as he could. He did just that.

Goodwin, who became the U.K.’s most highly paid CEO after the 24 billion-pound acquisition of National Westminster Bank Plc in 2000, has waived his right to bonuses and compensation for early termination of his contract and won’t receive about 1.2 million pounds for forfeiting his 12-month notice period, spokesman Carolyn McAdam said. He will continue to draw his salary until Hester takes over, helping the bank sell assets, reduce jobs and lessen its dependence on capital markets funding.

He should have returned bonuses from the heyday of the bubble, which is when he really should have been fired. Instead, management slams the door on an empty barn and Goodwin et al. make off with billions:

RBS is in advanced talks with two buyers to sell its insurance business, Goodwin said on today’s call. He didn’t say how much the bank may get for the business. The company also is looking at selling parts of businesses, assets and buildings to bolster its capital, Goodwin said.

2008-08-10 – Loss:

The Royal Bank of Scotland gave its second quarter 2008 results Friday and did something it had never done before. After 40 years in business, RBS reported its first loss loss, a record $55.3B. The bank also took $11.3B in write-downs. We were unable to determine total Level 3 assets, but the bank’s SFAS 159 comes in at $1.6B.

It said Friday that the charges were partly offset by a gain of 812 million pounds from the changing value of its own debt.

Here’s the tally thus far:

1. Write-Downs/Charge-Offs: $3.6B + 11.3B = $14.9B
2. Cash Raised: $24B
3. Level III Assets $0.0
4. Loan Loss Reserves: $2.84B

We now sum all the distresses to get Royal Bank of Scotland’s current Misery Index of $41.73B.  <>

2008-06-15 – Victory:

Royal Bank of Scotland declared victory from the right issue it announced last week. The bank raised $24bn of new capital. the $24 billion is already accounted for in our tally.

2008-06-06- Geting More More More:

RBS announced a rights issue, this week. The capital is meant to shore up a balance sheet battered by the battle over ABN Amro acquisition, and after massive write-downs on credit investments.

2008-06-04 – Raided:

Is the Royal Bank of Scotland beyond the long reach of the royal law? We may have an answer from an announcement that Britain’s version of the SEC, the Office of Fair Trading (OFT), raided the bank 13 days ago:

Barclays Plc and Royal Bank of Scotland Group Plc were raided by the U.K. antitrust regulator as part of an investigation into the price of loans to accountants, lawyers and other professional services firms.

The two banks were visited 12 days ago, Corinne Gladstone, a spokeswoman from the Office of Fair Trading said in an interview today. London-based Barclays said it approached the OFT with information about “inappropriate” contacts with one department in exchange for leniency on March 17.

Maybe we can start a count of the number of years in prison sentences for bank officials. <>

2008-05-14 – Outrageous:

Royal Bank of Scotland’s proposed rights issue was formally approved yesterday for $24B. The bank reminds me of a snake eating its own tail — this band aid can’t begin to stop the gushing from wounds opened by the acquisition of Dutch bank ABN Amro and the US subprime mortgage market. It was a forced move which only further fattens its usurers and elites, but delays the inevitable fatal hemorrhage.

In addition to the $3.6B in write-downs, we now count $24B in raised capital.

2008-04-22 – Unrighteous:

Royal Bank of Scotland first denied, then delayed, and finally confessed to the outrageous rights issue announced today:

Although the bank said at its annual results last month that it did not plan any significant asset sales, analysts at Cazenove said in a note this week that they expected the bank’s managers to pursue a number of other small disposals.

Forcing investors in Royal Bank of Scotland to come to grips with the most dilutive issue in the bank’s history:

Britain’s second largest bank will record write-downs of $11.7 billion and raise $23.9 billion in new capital to cover exposure to toxic U.S. loans

2008-04-10:

Royal Bank of Scotland wants to make sure everyone knows that the acquisition of Dutch rival ABN Amro has nothing to do with laying off 200 staff members of it’s global banking and markets business this week.

A spokesman for RBS refused to comment on changes to its workforce but said: “Most global financial institutions are reviewing their business in light of the current market conditions and we’re no exception”

I don’t believe you, but I don’t blame you either. In a world where ”competition is sin” according to David Rockefeller how could you resist the take down of your primary rival at the cost of only two hundred staffers?

2008-03-20:

About a month after the Royal Bank of Scotland reported earnings, someone noticed something funny, staggering actually:

Royal Bank of Scotland’s portfolio of mortgage-backed securities more than doubled to about £68.3bn last year after it led the consortium that bought the Dutch bank ABN Amro.

2008-02-28:

The nail biting is over as the results and consensus are in. And, the initial conclusion from most analysts was that RBS’s figures were far from reassuring.

If Sir Fred Goodwin had hoped the publication of a full set of audited results would help ease the stock market’s concerns about Royal Bank of Scotland’s performance, he will have been disappointed.

RBS came in with a pretax profit for the year to Dec 31 2007 of £7.3B ($14.5B), up 9 pct compared with the previous year, exclusive of earnings of businesses acquired from Dutch rival ABN Amro. The bank also raised its total dividend for 2007 to 33.2 pence per share, an increase of 10 pct. But the results could not deflect attention from the bank’s larger-than-expected write-downs stemming from the U.S. subprime housing crisis. Those write-downs of £1.6B ($3.2B) are due largely to a £456M ($904M) write-down on its exposure to U.S. bond insurers after they were hit by a rating downgrade.

The banks remaining exposure is listed as £8.8B ($13.4B) in commercial mortgages, £2.5B ($3.8B) to bond insurers, and a leveraged loan portfolio of £8.8B ($13.4B). Regarding that portfolio:

Johnny Cameron, head of RBS’s Global Markets business, stressed that – in the case of the bank’s £8.8bn leveraged loan portfolio - the writedowns reflected mark-to-market valuations that did not reflect the quality of the underlying loans. “We and most banks are unwilling to sell at a price that is quite wrong based on fundamentals,” he said.

Well… just because your level three assets fall short of the hoped-for value doesn’t mean that value is closer to their true worth in the long run. Indeed, even leveraged loans are pretty questionable right about now. Also, we will certainly see other write-downs worthy of immediate mark-down but not counted today. We will generously count the estimated write-down of $1.9B made only 48 hours ago against the actual of $3.6B. So RBS missed the mark by $1.7B.

2008-02-24:

Royal Bank of Scotland is set to report full fear 2007 earnings on Thursday, February 28, after market close. The company is reportedly like a confident athlete who expects a great performance before a championship match. And since earnings season has come to this, we will likely see a grand performance from the bank and CEO Sir Fred Goodwin.

Goodwin and his boardroom colleagues are relaxed about RBS’s financial health … barring a stomach-churning deterioration in the credit markets…

For much of the troubled year, turmoil swirled around everything from a rights issue to speculation about the bank’s low capital ratios, damaged in the take-down of Dutch bank ABN Amro last year. Through it all, the bank remained mum until December:

Last December RBS took a GBP 950 million, or roughly $1.9 billion, write down on its mortgage holdings, which was less than the market was expecting, and said that it expected to produce an operating profit and earnings per share “well ahead of market consensus.”

RBS said that net of hedges and writedowns, it had GBP 1.1 billion (or roughly $2.2 billion) of high grade CDOs containing commercial loan collateral, prime and subprime mortgage collateral, as well as GBP 1.3 billion (or roughly $2.6 billion) of exposure to “mezzanine CDOs based predominantly on residential mortgage collateral.” RBS marked the high grade CDOs at 90% of face value, and the mezzanine CDOs at 70% of face value, citing “outputs from our proprietary model, market data, and prudent valuation adjustments.”

Only RBS knows exactly what securities it owns, and the market price can vary dramatically. But a source on a Wall Street trading desk (who is not commenting on RBS specifically), says that in general, the high-grade CDOs are worth between 35 cents on the dollar and 75 cents on the dollar, and the mezzanine CDOs are worth between 10 cents to 50 cents on the dollar. That would imply substantial addition writedowns for RBS.

It is from this potential write-down that the bank will use all of its championship skills to deflect investors’ attention. First it will announce a record profit above £10.3B ($20.3B), up from £9.4B ($18.5B) last year. Any revelations of further losses on bad credit lines will offset that with a whopping 5% increase annual payout.

RBS is expected to announce about £400m ($0.7B) of additional write-downs stemming from its exposures to investments affected by the US sub-prime lending crisis. But the profit rise will still represent an increase of some 10% year on year.

Will Royal Bank of Scotland prevail Thursday or be upset? The only sure thing is that no one will remember if all that 90% rated junk (exposure) turns out to be 35% or less.

So, we begin our tally with the $1.9B it announced in December and look for another $700M on Thursday.

The symbols of a community always have intrinsic value to the people in it even though they benefit directly in no meaningful way. Even though the residents of Brooklyn New York gained no benefit, they even had their taxes raised to keep their baseball theirs, yet there was outrage when the Dodgers abandoned them for Los Angles. And so it is with HBOS whose symbos HBOS together have no official meaning, but to the people of Scotland the meaning is deep and intrinsic, it is widely recognised as an abbreviation for their bank, Halifax Bank of Scotland, them! And it was with the same shock and finality as a loss in sudden death overtime that Scotland met the word of the end of it’s oldest bank, but the credit crunch is no gentelmans game and unlike a sports team, for HBOS there will never again be a next year.

The credit crisis claimed another casualty Thursday when Lloyds TSB PLC announced a 12 billion pound (US$22 billion) deal to take over struggling HBOS PLC, Britain’s biggest mortgage lender and owner of major British banks including Halifax and the Bank of Scotland.

The Bank of Scotland is the UK’s oldest commercial bank, was formed by an Act of the Parliament of Scotland in 1695 and Halifax was founded in 1853 as the Halifax Permanent Benefit Building and Investment Society. The bank which many considered to be the true bank of Scotland, HBOS was formed when the two merged in 2001.

The bank has since with stood revolutions, the great depression, two world wars, the cold war and too many social and economic calamities to list. It has become a social financial pillar of the rock upon which sits Scotland. But in the roil and rumble of the credit crunch once immovable financial pillars are knocked over with the ease and capriciousness with which a child throws his toys to the floor. And so Bear Stearns, Fannie Mae and Freddie Mac, Merrill Lynch, Lehman Brothers AIG and now HBOS know the sudden death swiftness with which the credit crunch can seize and strip a bank to its penniless bone.

But unlike the others who succumbed to the greatest convulsion in financial markets this penniless bank still has an intrinsic equity which yields to the people of Scotland only a pain and confusion. The suddenness of its crash stunned them, the secrecy and lack of leadership of management betrayed them, and the resulting hyper drive of short-selling frenzy that descended on HBOS shares before the merger financially broke them, and broke their pride.

2008-09-19 – The Pain:

HBOS said that it is in “advanced talks” with Loyd’s of London over a merger to create a £30B banking giant with nearly a third of the UK mortgage market. At one point, before the merger speculation broke, HBOS’s share price was down 50 percent at 88p, less than a third of the value when the market opened on Monday morning. <>

2008-07-31 – The Spin:

HBOS reported earnings tonight and guess what, they beat estimates. But that’s the only thing they beat as write downs were $2.2B, capitial raised was a shaky $8B, loan loss provisions came in at $2.58B, and the bank holds a murky level 3 equivalent of $3.77B. Here’s the tally thus far:

1. Tally for Write-Downs/Charge-Offs: $3.5 B+ $1.1 B = $4.6 B
2. Tally for cash raised: = $8B
3. Current level of Level III assets at $3.77 B
4. Current level of loan loss reserves at $2.58 B

We now add all the distresses to get HBOS’s current Misery Index of $18.95B

2008-07-21 – The Message:

The message went out loud and clear to all banks trying to shift their trash heaps of debt onto investors. NO MORE! HBOS got its $4B in the rights, but the underwriters got screwed instead of screwing investors for a change.

2008-06-25 – The Rights Price:

After settling its rights issue, HBOS got squeezed by short sellers and its shares were rudely kicked down below the rights price.

2008-06-17 – It’s My Turn:

HBOS is providing a prospectus detailing plans to raise £4B from shareholders to shore up the credit-riddled balance sheet.

2008-05-19 – Off-Balance:

Banks are not writing down their write-downs and getting away with it. Instead they are writing them down in the balance sheet and there is a distinction.

HBOS was hiding $1.0B on the balance sheet, but we will balance things out for them by adding $1.0 B to their existing $2.5 total bringing them up to $3.5B.

2008-04-30 Raising £4B:

You can sense the urgency morphing into desperation at HBOS. After write-downs and downgrades, the bank has admitted to walking up to the Bank of England’s handout window.

2008-02-27 Earnings In Line:

HBOS reported earnings that were broadly in line with guidance, but write-downs of £225M ($447) were higher than the £180M announced in December.

Britain’s largest mortgage lender HBOS PLC reported Wednesday that profit rose 3.8 percent in 2007 despite a $447 million writedown on investments.

“An erosion of net interest margin, additional writedowns resulting from the credit crunch, and a slowdown in lending all contributed to the malaise surrounding the results.”

We have heard a lot of that lately.

2008-02-23:

HBOS is due to report full-year 2007 earnings on Feburary 27. The parent company of Bank of Scotland and mortgage lender Halifax said in a December 13 statement that it expects earnings to meet market expectations. Namely that:

Its underlying 2007 pretax profit is forecast to rise 4 percent to 5.78 billion pounds, based on the average of 17 analysts polled by Reuters Estimates.

That number would have been closer to £6B were it not for a £180M loss on securities.

An additional £550M loss on US subprime-related assets was written down and kept off the books so that it didn’t come off the bank’s bottom line. This £550M stood as of the end of August. The lender claims in a press release

to have reduced the exposure by 120 million to 430 million as of Nov. 30 (presumably by selling assets). Investment banking is responsible for 411 million of the banks total subprime exposure while equity trading accounts for the remaining 19 million. Then another 30 million pounds is marked down.

‘HBOS marked down 30 million pounds of U.S. subprime assets, which stood at 430 million pounds as of Nov. 30, down from 550 million pounds in August.’

So, the running total is £550M written down as of August + £30M = £580M of stated write-downs, and £430M of subprime exposure remaining as of the end of November.

They’re goners.

2008-09-11 Q3:

Lehman Brothers reported its fiscal third-quarter 2008 results last night. The results weren’t due for another week, but maybe they were afraid they wouldn’t be around by then. For the second consecutive quarter, the company has made no mention of its loan loss provisions. Hmmm… That may be very telling in and of itself.

1. Write-Downs/Charge-Offs: $7.2B + $5.6B = $12.8B
   
2. Cash Raised: $0.0
3. Level III Assets: $52.9B + $1.4B = $54.3B
   
4. Loan Loss Reserves: $?B

We now sum all the distresses to get Lehman Brothers’ current Pain Factor: > $67.2B

<>

2008-09-02 Closer and Faster:

It’s a characteristic of the credit crunch. Companies bolt from subprime disasters in a full sprint. But as time wears on, the companies wear down and those disasters catch up fast.

2008-09-02 Vultures:

Things become a little more dire every day for Lehman Brothers. From high above, the vultures have caught sight of the writhing body and are moving to close ranks with the bears on the beleaguered bank. More to come…

2008-08-18 Closing In:

With the third quarter rolling nearer, the bears keeping pace with Lehman Brothers are once again begining to close in. The whispers up and down the windy street are of a possible $2B loss. Is it true or just rumors disseminated by the bears? No way to tell, so we’ll just have to wait and see.

2008-08-14 – Three Rings:
The three ring circus rolls on as Lehman Brothers one ups Merill Lynch in the smoking balance sheet trick. Black Rock is buying Lehman’s damaged assets. Following so closely on the heels of Merrill’s unloading to Lone Star, you can’t help being suspicious. Maybe it’s not as bad as it seems, but we will have to wait for the details.

2008-07-30 -Q2 Misery:

Lehman Brothers seems to be taking cash it has raised and using it as loan loss reserves. Finding the loan loss reserves equivalent will take a bit more time, but for now we have an estimate of the troubled company’s Misery.

1. Write-Downs/Charge-Offs: $7.2B
2. Cash Raised: $6B
3. Level III Assets: $42.0B
4. Loan Loss Reserves: $?B

We now sum all the distresses to get Lehman Brothers current Misery Index: > $55.2B

2008-07-11 – Level 3:

Lehman is toxic in every category, including Level 3.

In a filing with the Securities and Exchange Commission late Thursday, Lehman said that its so-called Level 3 assets — those most difficult to value — actually rose relative to overall assets, from 6.1 percent in November of last year to 6.5 percent at the end of May of this year. The dollar value assigned to Level 3 assets fell slightly, from $42 billion to $41.3 billion; $20.6 billion of that total was in the form of MBS/ABS, Lehman said, the largest chunk of Level 3 assets valued.

WOW!!! Lehman reports later this month; let’s see how high the level 3 gets by then.

2008-06-30 – Barclay’s Takes a Bite:

Lehman Brothers is getting kissed to death. Last week it was BlackRock to the rescue; this week rumors are all they can muster to keep the share price afloat.

There is no longer a shred of doubt that Lehman Brothers is headed down toward single digits, possibly all the way to the the pink sheets. The kiss of death came yesterday when the stock gaped up at the open and closed up by $3.12 on the news that BlackRock would buy it

As a result, the stock finished the month under $20 per share, down from a close of $28 on June 14. Now Barclay’s is rumored to be a potential buyer for Lehman.

2008-06-15 – Connected Up:

Lehman Brothers reported a loss of $2.8B on net revenues of negative $700M for the second quarter of fiscal 2008. The firm reported a net loss of approximately $2.3B in the first half, with net revenues at $2.8B. Despite the staggering losses, it’s almost certain that more are on the way as the bank’s exposure remains high.

Oppenheimer & Co Inc analyst Meredith Whitney said there is still too much uncertainty about potential losses on Lehman’s exposures to mortgages. But the outspoken analyst said a bigger issue for the entire brokerage industry could be cost containment in the face of slower earnings growth.

“Managements like Lehman’s will need to radically resize their expense structures in order to deliver on [targeted] mid teen returns,” she said.

But on Wall Street, where competition is sin, high-ranking well-placed connections are exponentially more important than business models or balance sheets. It is there that banks like Lehman Brothers and JP Morgan, whose CEOs each have a seat on the Federal Reserve Board, can truly shine.

2008-06-14 – Rampant:

As the credit crisis closes in, the fervor of lies and deception is reaching a crescendo, the surest sign of desperation.

2008-06-12 – Purge:

The purge has begun as heads are finally being lopped off in the credit crisis.

2008-06-11 – The Mauling Continues:

Surrounded by bears and lacking any way to stop the bleeding, Lehman Brothers dumped distressed assets and transfused another $6B. The new money comes in addition to the $4B raised through April and as the bank speeds toward a second quarter loss of $2.8B stemming from $4B of credit-damaged assets.

Is it all over? Not likely. Mish has more on the ailing money center bank in Credibility Issues Haunt Lehman:

The stunning $2.8 billion second-quarter loss Lehman Brothers Holdings Inc. announced Monday stemmed in part from two big real-estate investments made at high prices near the top of the market that are coming back to bite the investment bank.

Lehman joined with Tishman Speyer Properties last year to pay $22 billion for real-estate investment trust Archstone-Smith in the largest apartment-building deal ever. And in a series of projects, it teamed up with Irvine, Calif.-based land developer SunCal Cos. to develop and sell thousands of house lots to builders across Southern California. Some $1.6 billion of assets from those deals remain on Lehman’s books.

Lehman is still holding $29 billion in commercial real estate having written off only $3.5 billion. Lehman calls this “very large”. I call it “peanuts”. And the fact that they are hiding amounts of individual writedowns on some very bad deals they have gotten into suggests a huge credibility problem that is not going away quickly or quietly.

…

The commercial real estate mess alone suggests the writedowns at Lehman have just begun.

With the above reality sinking in, the stock renewed its plunge and fell as much as 13% on June 11th.

2008-06-04 – The Beat Goes On:

Lehman Brothers’ denials and desperation are eerily similar to Bear Stearns’, and so is the heavy short interest.

2008-06-02 – Cut Down:

Lehman Brothers, the fourth-biggest U.S. securities firm by market value, was cut to A from A+ by S&P today in a move that may foretell of more serious write-downs and credit-related losses to come.

2008-05-23 - Deja Vu All Over Again:

Deep out-of-the-money puts are in vogue again as the volume spike says something different about the state of the bank’s affairs than is coming from management. Will the next earnings report bring massive write-downs or implosion for Lehman Brothers?

2008-05-22 - Write Downs Count of a Different Sort:

We have been keeping a running tally of write-downs and other credit-related distress taken by the major banks since 2007. But here comes a write-down count of a different sort: how much in write-downs and credit losses firms have written off per wholesale banking employee.

Lehman Brothers – $6.6B, 30,000 employees, $220,000 per employee

2008-05-14 – Sisyphus and Leveraged Loans:

In the hey-day of the credit bubble and the carry trade, Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers took in mountains of money making loans for leveraged buyouts. Banks make money by lending money, so fewer loans usually looks like less profits. But in the topsy-turvy aftermath of the credit bubble, when all loans are suspect and leveraged loans among the most toxic, banks are trying to rein in their balance sheets.

…, Lehman Brothers and Goldman Sachs are the most exposed to higher-yielding, and riskier, loans as of the first quarter: Over one-third of Lehman’s loan book is in high-yield. Goldman’s book is about half high-yield. Lehman leads the pack among its rivals with $28.7 billion of exposure to leveraged loans as of the first quarter. Goldman chopped its exposure to $27 billion from $43 billion last quarter.

2008-05-08 - Sleight of Hand:

Minyanville reports that Lehman’s level 3 assets have reached 171% of shareholder equity. Congrats, boyz.

2008-04-10 – Collateral of Last Resort: After we discovered that (see below)

• Lehman’s balance sheet isn’t shrinking, as we’d expect
• Lehman got more leveraged, not less
• Lehman includes debt in its calculation of equity

it seems Lehman and co-culprit the FED have pulled one off:

Wall Street firms may be bundling high-yield, high-risk corporate loans into securities to use as collateral to borrow from the U.S. government, according to a report by Morgan Stanley analysts.

The creation last month of CLOs comprised of loans for private-equity buyouts or other leveraged loans to larger companies totaling $11.4 billion ended “the deep freeze” in the market, and many arose from unusual motives, today’s report said. “At least one” recent CLO was probably done to take advantage of the Fed’s new facility, it said.

…

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, last month created the $2.8 billion Freedom CLO, the largest this year, out of loans that couldn’t be readily sold to investors, such as for buyouts of payment processor First Data Corp. and power producer TXU Corp. JPMorgan Chase & Co., Deutsche Bank AG and Barclays Plc also underwrote CLOs in March, according to data complied by Bloomberg.

So kids, now the Fed will collateralize your garbage as long as you say its ‘AAA,’ but please do not abuse this service!!!

Yeah, right.

2008-04-01:

With downgrades of 297 tranches you don’t have to be Einstein’s kid cousin to know that more write-downs are on the way, but you might have to dig up the old boy himself to figure out what it will be. BIG, I think. You will get the headline number as soon as we do.

2008-03-30:

You have got to wonder not only how they will write this one down, but what could be next for Lehman Brothers?

Lehman Brothers is accusing a Japanese trading company of perpetrating a massive fraud and plans to sue it for hundreds of millions of dollars,…

Lehman is seeking to recoup $350 million in defaulted loans, a company official said on condition of anonymity citing the sensitivity of the case.

Well I wouldn’t start sharpening my pencil just yet, remember this is Lehman Brothers of the Big Apple. And as we have seen, things seem to go a little smoother for these boyz than the rest. I bet they will get their dough and have no write-down.

2008-03-25:

Lehman dazzled last week with earnings that beat the street by dropping by more than half. The firm only wrote off an additional $1.8 billion (minuscule compared to some of the write-down and exposure estimates from our previous coverage, shown below). Now, don’t all run out and buy Lehman shares too fast. Of course, the street did, and shares surged by 46% the day of the announcement.

Unfortunately a few little problems linger, including the fact that normal earnings are collapsing.

Conde Nast draws attention to some of the stubborn trivialities (that only grumpy malcontents like us would care about, of course):

What actually happened to Lehman’s balance sheet in the first quarter? Assets rose. Leverage rose. Write-downs were suspiciously minuscule. And the company fiddled with the way it defines a key measure of the firm’s net worth.

That all sounds bad. We can’t help but rubberneck, and Conde Nast doesn’t disappoint:

Lehman’s balance sheet isn’t shrinking, as we’d expect.

Lehman finished the first quarter was total assets of $786 billion, up almost 14 percent from the previous quarter and 40 percent from a year earlier. Other financial institutions are taking down their exposure right now amid the market turmoil to be prudent. Lehman says it wants to. It is not.

Lehman got more leveraged, not less.

The investment bank’s “gross” leverage hit 31.7 times equity, up from the fourth quarter and way up from last year’s 28.1…

Lehman includes debt in its calculation of equity. Say what?

It’s always worrisome when a company changes a key definition of a closely watched measure of financial performance. In a note in its earnings release, Lehman said it has a new definition of “tangible equity,” or the hard assets that it has left over after subtracting its liabilities. This is a measure of net worth, the yardstick by which investment banks are valued. Lehman’s new definition allows for a higher portion of long-term subordinated borrowings (which it calls “equity-like”) in tangible equity…

Lehman reaped substantial earnings gains because investors thought it is more likely to go bankrupt.

For several quarters, all the investment banks have been taking gains on their liabilities. Say you owe $100 to your friend, but you run into severe problems and your friend starts to figure you can only afford to pay back $95. If you were an investment bank, the magic of fair value accounting dictates that you could get to reduce your liability. What’s more, that $5 gain gets added to earnings. Because investors thought Lehman was more likely to default, its liabilties fell in value and Lehman garnered earnings from this. How much did Lehman win through losing? $600 million in the quarter. How much was its net income? $489 million. [Ed. note: this is the FAS 159 stuff.]

Lehman and all the other investment banks are following the accounting rules on this, but that $600 million is hardly the stuff of quality earnings. Indeed, Bernstein’s Hintz called the bank’s earnings quality “weak.”

Lehman’s write-downs seem tiny.

Lehman finished the quarter with $87.3 billion of real estate assets. These include residential mortgages and commercial real estate paper. The bank only wrote these assets down by 3 percent. And its Level III assets —the hardest to value portion of these instruments—were written down by only the same percentage. The indexes and publicly traded instruments and companies that serve as proxies for these securities generally fell more than that in the quarter.

But other than those minor points, Lehman is fit as a fiddle. Why S&P put them on ratings watch negative is beyond us.

Oh, right, except for their remaining Alt-A exposure:

The total amount of such mortgages on Lehman’s balance sheet was $14.6 billion in the first quarter and it actually rose from $12.7 billion in the previous quarter. Is this the time to be increasing exposure to questionable mortgages? More ominously, only $1 billion of that figure is prime and the rest is Alt-A, according to Hintz’s estimate.

But that’s all.

2008-03-17:

With JP Morgan picking at the bones of Bear Stearns’ still warm corpse, it’s now Lehman Brothers running from the same “unmerciful disaster”. Yesterday’s $2 billion infusion dresses up the balance book, but out on the Street it smells like blood:

The same thing that drove Bear Stearns into the gutter is now Lehman’s worst enemy: Fear. The speed and severity of Bear’s collapse is throwing gasoline on the firestorm of panic now consuming the debt market.

Down in the pits, fear morphs into greed as the same ominous options activity is taking place now on Lehman’s put contracts:

Options traders are making big bets that Lehman stock will drop an additional 24% by Thursday, when March options expire, Dow Jones Newswires reported. Traders also are betting that the shares will continue to plummet over the next month.

Lehman is caught in the same frenzy of credit capture and denial as Bear Stearns was in last week:

In an effort to quell concerns, Lehman CEO Richard Fuld said, “The Federal Reserves decision to create a lending facility for primary dealers and permit a broad range of investment-grade securities to serve as collateral improves the liquidity picture, and from my perspective, takes the liquidity issues for the entire industry off the table.”

And it would if credit equaled earnings or earnings were anywhere to be found (it would also help if the Fed’s balance sheet were infinite — but it’s not). If Lehman thinks it can borrow its way away from the credit crunch it had better pick up the pace.

Lehman reports tomorrow before the bell.

2008-03-16:

The rope that Lehman Brothers is swinging from just got $2 billion longer even as the noose tightens. To fend off a Bear Stearns-style bank run, Lehman:

obtained a $2 billion credit line as the investment bank tried to blunt the stock’s worst drop in almost eight years and assure investors the firm isn’t short on cash.

Long on cash is nice if $2 billion is anything these days, but what investors really want to hear is about the bank’s strong income stream… and no one is holding their breath.

Although not a write-down, mark-down or charge-off, it is a credit crunch-related incurred debt so we must tack on the $2 billion.

2008-03-11:

Lehman’s greatest risk comes not from Variable Interest Entities (VIE’s) or any other chemically-concocted investment vehicle or scam, but rather from the combustible mixture of leverage and margin calls. Here Mish quotes Professor Bennet Sedacca

When I look at the Lehman Brothers’ (LEH) balance sheet and see it levered 40 to 1, I wonder how on Earth did anyone allow it to get that leveraged? Consider that Lehman has four times as many ‘Level 3 Assets’ (those that are ‘hard to price’) as it does capital. Hard to price in my book equates to ‘hard to sell’.

So you have to sell your assets at a deep discount to answer the margin calls, but you can’t sell because everyone else is in the same boat. Sounds like a heart attack in a lonely place. Professor Bennet Sedacca is not alone. Deutsche Bank

cut Q1 EPS estimates from $1.02 to $0.57, 2008 from $6.15 to $4.10 and 2009 from $7.20 to $6.45. The firm slashed its price target from $75 to $54.

The firm expects Lehman to report 1st-half mark downs of about $4.6B (including about $2.3B in Q1), due to leverage loans, CMBS, subprime/Alt-A and European whole loans.

So far it looks like we will chalk up another $1.2 billion in write-downs for Lehman, maybe more.

2008-02-27:

Bloomberg points out another form of exposure for Lehman:

VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights Inc… VIEs, known as special purpose vehicles before Enron Corp.’s collapse in 2001, finance themselves by selling short-term debt backed by securities, some of which are insured against default.

…

The industry’s VIEs, also known as conduits, had $784 billion in commercial paper outstanding as of last week, according to Moody’s Investors Service and the Federal Reserve.

…

Lehman, which wrote down the net value of subprime securities by $1.5 billion, guaranteed $6.1 billion of investors’ money in VIEs and $1.4 billion of clients’ secured financing as of Nov. 30, according to a filing also made on Jan. 29.

VIEs are yet another alphabet soup three-letter acronym that simply means “off-balance-sheet vehicle” (and hence, liability). We talk more about them over at our Citigroup entry. Goldman’s exposure is discussed here.

Based on the Lehman numbers above and Goldman’s loss estimates (an implied 58% loss multiplier factor), we figure Lehman’s $7.5B in VIE-related obligations could cost them as much as $4.4B in write-downs. On the exposure, Lehman says coyly:

“We believe our actual risk to be limited because our obligations are collateralized by the VIE’s assets and contain significant constraints,” Lehman said in the filing. Spokeswoman Kerrie Cohen wouldn’t elaborate.

Judging by the kind of junk typically found in these VIEs (subprime CDOs, commercial paper), this is hardly reassuring. Goldman’s VIEs hold CDOs; if we take prevailing write-down estimates based on market quotes (.27 on the dollar), we can up the damage estimate to $5.4B.

Want to maybe elaborate on that collateral, Lehman?

Mish also has a nice rant on the topic of VIEs and the above Bloomberg article.

2008-02-21:

Of the sundry of opaque possible exposures for Lehman Brothers, Oppenheimer analyst Meredith Whitney estimates leveraged loan write-downs would be about $23.82 billion – as big as the firm’s fiscal fourth quarter. Ouch! We will have to wait until they book the loss or write it down to add it to our tally, but don’t hold your breath.

In addition we will keep our eyes open for more fuzzy accounting in the form of financial accounting standard rule 159 (FAS 159), which allows a company to report gains on its 2007 income statement simply because of the widening of the credit spreads in own debt.

2008-02-01:

Lehman announced $2.6B of subprime-related write-downs in the second and third quarters of 2007 (Deutsche Bank data). They also reported $1.8B of remaining subprime CDO exposure (we’re unsure what the write-downs on this pile turned out to be). For the fourth quarter, Lehman announced $3.5B of mortgage-related losses, but claimed to have offset all but $830M of these with hedging.

In mid-Jan. 2008, the company shut down the correspondent and wholesale origination operations of its Aurora Loan Services unit, shedding about 1300 jobs. Throughout 2007, Lehman had already laid off about 2,500 people throughout its various mortgage lending subsidiaries (including BNC, which accounted for about 1,200 layoffs), folding most continuing operations into ALS.

All of this marginal lending spurs the question of whether Lehman has really written off all of the losses they will see for loans originated under its operations, or whether they might have various sorts of lingering exposure. Perhaps pointing the way towards an answer is a lawsuit against Lehman pending “down under:”

Wingecarribee, near Sydney, claims Grange Securities, now Lehman Brothers Australia, failed to act in the council’s best interests and engaged in misleading and deceptive conduct while serving as its financial adviser and investment manager by promoting the Lehman-originated Federation CDO, which was exposed to the US subprime market.

Federation was last month marked down to 16 cents in the dollar by Grange, meaning councils saw the value of their investment drop 84 per cent.

At issue here is obviously the question of how much of this sort of losses Lehman should take. Looks a lot to us like “toxic waste” being dumped on naive public funds. One might ask, even if Lehman can get away with this judicially, will it really be good for their long-term business (especially overseas)? More on this saga can be found here. [Update, Feb. 2: This article finds Merrill opting to simply pay up in a similar situation, so this is a real possibility.]

We will certainly be watching.

As for general derivatives risk, the data we’ve seen suggests Lehman has about $12.4B of exposure to AA or lower counter-parties (and $24B total). That amounts to about 70% of tangible equity (Dec. 2007 figures).

IKB was bailed out again! This is the final bailout which is actually a buyout of the subprime battered German bank. With that we say that the tortured bank has imploded not so quietly into that good night. The parent bank KfW has been in frantic, 11 month quest for a buyer for what has essentially become a level 3 asset.

KFW says it’s a good deal, but it’s more like good riddance and good deal or not for once, you can take management at its word it is happy to be done with IKB.

2008-05-27 Battered:

The battering goes on for IKB. As the bank confesses to a $1.6 billion loss in in the first nine months of 2007. The bank forecasts a loss of $315 million for its fiscal year 2007. among its numerous distresses, the bank has received $12.6 billion of bailout money, which we consider capital raised. IKBs financial statements are a mess and incomplete. We will provide level 3 assets when they become available.

As for the third quarter results, which had been long delayed because of its bailout, the bank said it earned 10 million euros ($15.8 million) in the October-December period, but did not provide the figures from a year earlier. However it said the result was hurt by another 70 million euros ($110.3 million) in write-downs, along with tax-related expenses of 61 million euros ($96.1 million).

IKB also said that its provisions for likely loan losses in the period was 207 million euros ($326.3 million), up from 192 million euros,

For now, we have $1.3 billion in prior write-downs to which we add the $110.3 million and tack $326 million of loan loss provisions on top of that.

Here’s the tally thus far:

1. Tally for Write-Downs/Charge-Offs: $1.3 B+ $110 M = $1.41 B
   
2. Tally for cash raised: $12.6 B
   
3. Current level of Level III assets at ?
4. Current level of loan loss reserves at $326.3 M

We now sum all the distresses to get IKBs current Pain of $14.3 B

What is striking in items one to four is the walk being 12.6 billion dollars of bailout cash without which the bank would have long ago, imploded.

2008-03-20:

The outlook at IKB has changed from returning to healthy profitability to stark survival as it now fights for its very life:

“The bank is dead and as I mention on each and any occasion, it has seen further problems; the bank is not worth a dime,” one Frankfurt trader said.

Dead or dead man walking, trading in the banks shares was frozen when it issued yet another profit warning, and revealed that it was suspending the sale of billions of euros of risky assets tied to US subprime mortgages, and getting yet more state aid:

Trading in shares of ailing IKB Deutsche Industriebank AG was halted briefly Thursday after the company disclosed another profit warning and warned of more write-downs on its portfolios that would result in a loss of some $1.3 billion.

According to our count the subprime related write-downs to are at least 950M euros or $1.41B and the running total on the bail out is up to $10.2B, accounting for losses of 2.1 billion euros ($3.3 billion). To that we can add the $1.3 billion in losses written down to subprime mortgages above.

There is no way to account for the bank’s remaining US subprime related exposure, but maybe we should for this particular bank keep a running tally of the number of bailout attempts. So far, the number is four.

2008-03-14:

March comes like a lion and in its first 14 days IKB has received a downgrade on its hybrid securities from Fitch and a lawsuit over subprime loans by US bond insurer FGIC.

It may not sound like much, but there is no way to overestimate the threat posed by the lawsuit. First, win or lose, there will be more suits filed. Second, there is no institution on earth capable of surviving the forced payouts of a courtroom defeat. So, with the simple mundane act of filing of that lawsuit IKB finds itself exposed to the crushing weight of incalculable liabilities of the subprime contagion under which the bank may simply implode.

We will not change the tally above, but note a possible “infinity” has just been added.

2008-02-19:

When scandal-riddled (IKB) Deutsche Industriebank AG came clean about its ties with US subprime last summer, the shares sold off and the CEO Stefan Ortseifen retired.

First the bank said ‘earnings will be “significantly lower” than the 280 million euros ($383.5 million) that it had forecast,’ at which point KfW, a German state-backed bank which holds 38% of IKB, moved in to assure the bank’s creditworthiness. It was a costly, move exceeding $3 billion. It may have worked for the short term, as Commerzbank, despite subprime troubles of its own, announced a rescue package for IKB. Other banks expressed interest, attracted by the bank’s position as the “market leader in Germany for long-term lending to medium-sized enterprises.” But with no end in sight to the mounting losses, KfW pulled out . But it was not so easy to leave (in echoes of Northern Rock), and now the on-again-off-again KfW led bailout is on again and up to 7.7 billion euros.

Strangely, it has been almost impossible to find data on the amount of write downs IKB has taken — it’s like a state secret. But there is copious reporting of the most recent bailout amount. As of February 12 ,

It has been propped up by two rescues costing more than €6 billion, or $8.7 billion, and shouldered mainly by its top shareholder, the state bank KfW.

And the very next day the stricken bank got 1.5 billion more:

Germany agreed a 1.5 billion euro rescue package for IKB on Wednesday, the third bailout for the subprime-stricken German lender, saying a collapse of the bank would have “incalculable” consequences.

To who, the insiders? State bureaucrats and upper-echelon management? One should consider at this point that in the long term, the people may actually benefit from greatly-increased transparency and some real free market discipline. The bailout will have have at least one very calculable consequence for taxpayers: inflation (unless, improbably, the value of these assets comes back to somewhere near par).

Finally on Feburary 13, we get some info on write-downs:

Late on Wednesday, IKB announced new write-downs, saying it had revalued its balance portfolio investments of currently 5.9 billion euros and the valuation losses exceeding the existing risk shield provision added up to about 950 million euros.

So the subprime related write-downs to are at least 950M euros or $1.41B and the running total on the bail out is up to $10.2B.