How Did Lehman Delever?

Naked Capitalism looks at the question "Just How Did Lehman Delever?"

I tracked Lehman’s (LEH) stock action before and afterwards — I don’t pay much attention to conference calls, as I have this regrettable tendency to believe what CEOs and CFOs say to me, most often to my financial detriment. Over the years, I’ve learned to skim the results of the calls, but pay close attention to the stock action.

My sense is the LEH buyers are doubling down, throwing good money after the bad of the $28 convert. Despite enthusiastic buying, the true believers could not get back over the syndicate price. 

Which brings us back to Naked Capitalism. Yves has an email from a former Lehman managing director, and its worth reading, if not for the answers but for the questions they raise, about Lehman’s balance sheet exposures, land holdings, and rising compensation expenses during a time of 1,900 layoffs.

In theory, the 10Q should clear some of this up . . .

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  1. DCM commented on Jun 17

    interesting stuff, but you gotta take with a grain of salt given it’s an anonymous source…at least until mgmt has a chance to answer a direct question about it.

    for now, most will throw it in the “random blogger” bin. maybe charlie gasparino will have something to add to the discussion.

  2. ECONOMISTA NON GRATA commented on Jun 17

    “My sense is the LEH buyers are doubling down, throwing good money after the bad of the $28 convert.”

    You are correct sir….. With a little bit of help from the shorts it brought the price back near 28… Nice “DEAD CAT BOUNCE”. We should be near the apex. Perhaps GS earnings will help a little, you know, guilt by association. LEH still has a lot of explaining to do. I do not think that they will be able to make it through another earnings period. Today, I’m selling a few “dead cats that” I bought last Thursday on the close.

    Best regards,


  3. michael schumacher commented on Jun 17

    Dick Fuld is doing the same thing he did during LTCM…..hold and hope. That he gets credit for his “leadership” during that much smaller debacle is just laughable.


  4. Patrick commented on Jun 17

    Barry: that is one juicy article.

  5. Mike in NOLA commented on Jun 17

    Anyone sought comments from Einhorn? Interested so see how satisfied he is.

  6. Patrick commented on Jun 17

    If anyone has time, could someone explain to me how Lehman would move those assets off its book into these SIV funds?

    This is my confused understanding:

    Step 1: Gives $55 billion in paper to the SIV.

    Step 2: Since this paper is already structured, there is no need to do the usual “sell bonds at x% and buy bonds at x% + y%”, right? The obligations are just transfered, with 45% being retained by Lehman? Or does the SIV use the paper as collateral and do the usual sell shares in itself while buying paper with more return, with Lehman paying for 45%? Who would buy the 55% anyway?

    Step 3: Lehman provides the liquidity backstop but doesn’t have to report how much, right? Or deduct it from it’s own liquidity requirements?

    Step 4: Profit? 55% is moved off the books, Lehman makes 45% of the SIV’s profit, and can still make interest on the liquidity back-stop while not having to account for the potential risk?

  7. michange commented on Jun 17

    How comes people did really want to reinvest in LEH at all?

    Where did the recap billions come from?

  8. pft commented on Jun 18

    First of all, LEH’s CEO sits on the board of the NYFRB, just like JPM, and unlike BSC.
    Help is just a phone call away.

    Second, there is new math.

    -1+ -1 = 2

    Merrill Lynch, Citigroup, and other financial companies, including LEH use the new accounting rule ( FASB 159 ) to book revenue after a decline in prices of their own bonds. They report gains when market prices for their liabilities fall. LHB booked 1.8 billion in revenue from this rule.

    “They can post substantial gains as a result of a decline in their own creditworthiness,” said James Cataldo, a former director of treasury risk management for the Federal Home Loan Bank of Boston and now an assistant professor of accounting at Suffolk University in Boston. “It’s completely legitimate, but it doesn’t make sense by any way we currently have of thinking of net income.”

    Also, the value of the Level III assets that nobody wants except the Fed, are determined by the companies own models of valuation. Want a boost, just tweak the model and justify the change by saying you have new information that allows you to do so, and loe and behold, they are worth more than we thought.

    Bad Bankers.

    It’s a legalized con job.

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