September 11, 2008 – 6:45 pm


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

2008-07-11Level 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.

2008-06-30Barclay’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.

2008-06-15Connected 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.


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


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

2008-06-11The 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.

2008-06-04The Beat Goes On:

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

2008-06-02Cut 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.


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.


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.


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.


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.


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.


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.


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.


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.


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).

  1. 2 Trackback(s)

  2. Apr 10, 2008: Bank-Implode! » Three for $1 Billion
  3. May 23, 2008: Bank-Implode! » Bears Prowling for Lehman

Post a Comment