Lehman (LEH)

[rffrydr]

The most mortgage exposed investment bank brings cheers before the Fed Cut:

http://www.ft.com/cms/s/0/63bda490-6534-11dc-bf89-0000779fd2ac.html

[rffrydr]

Getting over Lehman

Published: December 22 2010 09:46 | Last updated: December 22 2010 19:12

So everything will be OK after all. Just in time for Christmas, the US stock market on Tuesday returned at last to the level it held on September 12th 2008 – the final day of trading before Lehman Brothers’ bankruptcy. The S&P 500 index did briefly bounce amid the confusion of the following week, as plans for the troubled asset relief programme provided fleeting hopes of stability but it has been a long journey back. Investors now face a very different market from the one that closed on that nervous autumn afternoon.

Judged by the best performer over the period, Americans stayed at home and watched videos: subscription service Netflix is up sixfold. But it is perhaps more a reflection of how rapidly technology fortunes change that tech claims seven of the other top-10 performance spots while also accounting for two of the worst: games maker Electronic Arts and semiconductor wafer manufacturer MEMC both dropped by two-thirds.

There is a survivorship bias, with several banks no longer in the index but the two worst performers reflect their diminished status after state rescues: AIG down 77 per cent, and Citigroup down 73 per cent.

Most sectors have barely budged but after two years of crisis and recession one surprise is that the consumer discretionary sector is the best performer, worth 22 per cent more than it was pre-Lehman. The financial index, meanwhile, is down 24 per cent. More surprisingly, Standard & Poor’s data show the proportion of the index in financials, at 15.9 per cent, is actually larger than the 15.3 per cent pre-Lehman, because new banks have entered the index. This is still down from the 20 per cent peak in 2007.

As to the future, the market is cheaper as a multiple of earnings but pays almost a fifth less in dividends. It is not time to relax.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Let Freedom ring. The most liquid assets went to....wait for it....me and you:

http://ftalphaville.ft.com/blog/2010/03/19/180086/on-the-trail-of-the-pdcf-clos/


This stuff makes the injustices suffered by the banks now a little more easy to swallow. Of course the valuations turned out to exceed all (obfus-)expectations....and once again the lie becomes its own truth--the Mississippi Bubble did much to make this fair country of ours. Nothing is Obvious.
_________________
Today is the Tomorrow you worried about Yesterday!

[nodoodahs]

Nothing counter-intuitive about putting the most liquid assets into the repo, as those would be the only ones anyone would want to loan against ...
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[rffrydr]

What's in Repo 105?

http://ftalphaville.ft.com/blog/2010/03/12/173261/whats-in-repo-105/
_________________
Today is the Tomorrow you worried about Yesterday!

[nodoodahs]

One report I read had Buffett refusing to do a deal with LEH because Fuld was unwilling to ask/require LEH execs to buy in on the same deal as a condition for it. Supposedly because LEH execs are already too heavily compensated in stock. My opinion is that Fuld had seen the pig without lipstick and no way was he going to do a deal that required he own more of LEH at the end of it!
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

Looks like we may have a lot more lawsuits on our hands:

Report Shows How, Collapsing, Lehman Hid Woes

On Friday March 12, 2010, 3:26 am EST

It is the Wall Street equivalent of a coroner's report -- a 2,200-page document that lays out, in new and startling detail, how Lehman Brothers used accounting sleight of hand to conceal the bad investments that led to its undoing.

The report, compiled by an examiner for the bank, now bankrupt, hit Wall Street with a thud late Thursday. The 158-year-old company, it concluded, died from multiple causes. Among them were bad mortgage holdings and, less directly, demands by rivals like JPMorgan Chase and Citigroup, that the foundering bank post collateral against loans it desperately needed.

But the examiner, Anton R. Valukas, also for the first time, laid out what the report characterized as "materially misleading" accounting gimmicks that Lehman used to mask the perilous state of its finances, Michael J. de la Merced and Andrew Ross Sorkin report in The New York Times. The bank's bankruptcy, the largest in American history, shook the financial world. Fears that other banks might topple in a cascade of failures eventually led Washington to arrange a sweeping rescue for the nation's financial system.

According to the report, Lehman used what amounted to financial engineering to temporarily shuffle $50 billion of troubled assets off its books in the months before its collapse in September 2008 to conceal its dependence on leverage, or borrowed money. Senior Lehman executives, as well as the bank's accountants at Ernst & Young, were aware of the moves, according to Mr. Valukas, the chairman of the law firm Jenner & Block and a former federal prosecutor, who filed the report in connection with Lehman's bankruptcy case.

Richard S. Fuld Jr., Lehman's former chief executive, certified the misleading accounts, the report said.

"Unbeknownst to the investing public, rating agencies, government regulators, and Lehman's board of directors, Lehman reverse engineered the firm's net leverage ratio for public consumption," Mr. Valukas wrote.

Mr. Fuld was "at least grossly negligent," the report states, adding that Henry M. Paulson Jr., who was then the Treasury secretary, warned Mr. Fuld that Lehman might fail unless it stabilized its finances or found a buyer.

Lehman executives engaged in what the report characterized as "actionable balance sheet manipulation," and "nonculpable errors of business judgment."

The report draws no conclusions as to whether Lehman executives violated securities laws. But it does suggest that enough evidence exists for potential civil claims. Lehman executives are already defendants in civil suits, but have not been charged with any criminal wrongdoing.

A large portion of the nine-volume report centers on the accounting maneuvers, known inside Lehman as "Repo 105."

First used in 2001, long before the crisis struck, Repo 105 involved transactions that secretly moved billions of dollars off Lehman's books at a time when the bank was under heavy scrutiny.

According to Mr. Valukas, Mr. Fuld ordered Lehman executives to reduce the bank's debt levels, and senior officials sought repeatedly to apply Repo 105 to dress up the firm's results. Other executives named in the examiner's report in connection with the use of the accounting tool include three former Lehman chief financial officers: Christopher O'Meara, Erin Callan and Ian Lowitt.

Patricia Hynes, a lawyer for Mr. Fuld, said in an e-mailed statement that Mr. Fuld "did not know what those transactions were - he didn't structure or negotiate them, nor was he aware of their accounting treatment."

Charles Perkins, a spokesman for Ernst & Young, said in an e-mailed statement: "Our last audit of the company was for the fiscal year ending Nov. 30, 2007. Our opinion indicated that Lehman's financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view."

Bryan Marsal, Lehman's current chief executive, who is unwinding the firm, said in a statement that he was evaluating the report to assess how it might help in efforts to advance creditor interests.

Repos, short for repurchase agreements, are a standard practice on Wall Street, representing short-term loans that provide sometimes crucial financing. In them, firms essentially lend assets to other firms in exchange for money for short periods of time, sometimes overnight.

But Lehman used aggressive accounting in its Repo 105 transactions: it appears to have structured transactions such that they sold securities at the end of the quarter, but planned to buy them back again days later. These assets were mostly illiquid real estate holdings, meaning that they were hard to sell in normal transactions.

The effect of the accounting was to artificially and temporarily lower the firm's debt levels to hit certain targets, making the firm look healthier than it really was.

In a series of e-mail messages cited by the examiner, one Lehman executive writes of Repo 105: "It's basically window-dressing." Another responds: "I see ... so it's legally do-able but doesn't look good when we actually do it? Does the rest of the street do it? Also is that why we have so much BS [balance sheet] to Rates Europe?" The first executive replies: "Yes, No and yes. "

Mr. Valukas was appointed by the United States Trustee in the case in January 2009 to investigate the causes of the Lehman bankruptcy, as well as to find out if any fraud or misconduct took place.

Mr. Valukas writes in the report that "colorable claims" could be made against some former Lehman executives and Ernst & Young, meaning that enough evidence existed that could lead to the awarding of damages in a trial. He added that Lehman's directors were not aware of the accounting engineering.

By his reckoning, Lehman managed to "shed" about $39 billion from its balance sheet at the end of the fourth quarter of 2007, $49 billion in the first quarter of 2008 and $50 billion in the second quarter. At that time, Lehman sought to reassure the public that its finances were fine - despite pressure from short-sellers like the hedge fund manager David Einhorn.

Executives, including Herbert McDade, who was known internally as the firm's "balance sheet czar," seemed aware that repeatedly using Repo 105 was disguising the true health of the investment bank. "I am very aware ... it is another drug we r on," he wrote in an April 2008 e-mail cited by the examiner's report. At other times, he is described as calling for a limit to the number of Repo 105 transactions.

By May and June of 2008, a Lehman senior vice president, Matthew Lee, wrote to senior management and the firm's auditors at Ernst & Young flagging "accounting improprieties." Neither Lehman executives nor Ernst & Young alerted the firm's board about Mr. Lee's allegations, according to the report.

Mr. Fuld is described in the examiner's report as denying having knowledge of the Repo 105 transactions, and there is no evidence that he directed subordinates to make use of that aggressive accounting. (He did recall issuing several directives to reduce the firm's debt levels.) But Mr. McDade is reported as telling Mr. Fuld about using Repo 105 to achieve that goal.

[rffrydr]

Buffett's scary movie:

http://www.cnbc.com/id/15840232?video=1255599372&play=1
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Obviously, this cannot be "business as usual." I feel many in Wall Street and business schools all around the world still don't have a firm grasp of the most likely consequences of the failure of Lehman, the extreme loss in long-term confidence, etc. We all say that deleveraging will be a feature of the US economy for years to come, but what are the most likely consequences? Even in a benign world of increasing productivity and robust economic growth outside the OECD, we are still likely to witness bouts of deleveraging and other events that Americans simply have not dealt with in years. Examples include:

1) As mentioned in our commentaries, the deleveraging in the residential mortgage industry will be a decade long event. Housing prices in parts of California, Florida, and New York will remain flat on a nominal basis for years to come.

2) The Fed Funds rate will remain below 2% until 2015, as a loose monetary policy "makes up" for the lack of flexiblity in fiscal policy due to the already high federal debt.

3) The DOJ will most likely try to break up America's largest banks such as JP Morgan Chase, Citigroup, Bank of America before everything is said and done.

4) Financial engineers will be sent packing as the ABS and other parts of the structured finance market will hobble along for years to come. The classics become popular reading once again - and both undergraduate and graduate economics students start learning (seriously) about Keynes, Schumpeter, and Fisher once again.

5) London will no longer be a dominant financial center. New York City will still be a major financial center but the city will be hobbled until the middle of next decade. Singapore, Hong Kong, and Shanghai will continue to expand their global market shares in financial services.

6) Compensation packages in Wall Street - even for those that still have decent jobs - will structurally decline. Without the use of leverage, hedge fund and private equity managers simply cannot package levered or exotic beta into alpha. And investors have grown too sophisticated to be paying "2 and 20" to an entire industry that is arguably saturated. Even the traditional investment banking roles of share underwriting, M&A advisory, etc, will not be valued as much as they used to be.

7) The most promising jobs in the long-run - for those that are graduating today and who want to develop a career in the financial industry - are with the government today. This includes positions within the large, sophisticated public pension funds, SWFs, and positions that deal with various aspects of the TARP, TALF, etc. This is not unsimilar to the French model where the smartest graduates go work for the government initially for 20 years or so; then develop a second career (where the real money is made) in the private sector afterwards.

[rffrydr]

Bloomberg in depth series, related to book, "House of Cards," on the failure of the "bankers circling the wagons" attempt at stabilization. GE and Money Market funds amongst others feature here.

http://www.bloomberg.com/apps/news?pid=topnews
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

One of stockcharts most searched companies. These BKs show the collective sense of catchup is still with us. I'm for buying the unwashed and tainted masses but we've reached my limit.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The investment bank is an investment bank again: perhaps no greater sign than the proposition from Merrill execs to buy back their company from BAC--rejected:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAfpm.etB2wY
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Lehman liquidator discusses his side of the story on Spiegel Online. Refuses to discuss the political nature behind the Lehman failure, but his story (and Bernanke's recent interview on 60 Minutes - his coverage of his boyhood/blue collar past was nicely done) should give folks who want to let big banks fail some pause:

http://www.spiegel.de/international/business/0,1518,613196,00.html

[rffrydr]

Managers pick up the "crown jewel," 2.1 billion for 51%--49% to "The estate."

http://www.nytimes.com/2008/12/04/business/04lehman.html

Interesting terms for failed bidders:

[rffrydr]

The ado is creeping far and wide:

[HenryTo]

Much ado about nothing:
----------------------------------------------------------------------------------
Fears about Lehman CDS deadline seen as overstated
Tue Oct 21, 2008 1:09am EDT

By Karen Brettell

NEW YORK (Reuters) - Tuesday's deadline to settle an estimated $400 billion in credit default swaps on debt in failed investment bank Lehman Brothers is unlikely to trigger new havoc in the market, derivatives analysts said.

Tuesday is the final day credit default swaps on Lehman's (LEH.N: Quote, Profile, Research, Stock Buzz)(LEHMQ.PK: Quote, Profile, Research, Stock Buzz) debt can be paid out.

Speculation has mounted that banks and other sellers have been hoarding cash to pay out a massive 91 percent loss on the contracts.

Some analysts on Monday attributed gains in the U.S. dollar to demand for dollars needed to pay the insurance.

But experts say the fears are exaggerated and in any case, losses may not be made public until companies post their next quarterly earnings in the months to come.

"There's been a lot of talk about this but I don't think it's that material, there has been a lot of misunderstanding," said Sivan Mahadevan, head of credit derivative and structured credit research at Morgan Stanley in New York.

"I think it's been overdone."

Credit default swaps are insurance-like securities that protect against the risk of a borrower defaulting on debt.

The $55 trillion market has created concerns that it may pose systemic risks as the private nature of the market makes it impossible to know who holds what risk, and how large any exposures are.

Part of the worry about the Lehman swaps is the $400 billion in insurance outstanding, although this number overstates the amount of money that will actually be transferred.

The Depository Trust and Clearing Corporation, which clears the vast majority of trades in the over-the-counter market, said this month only $6 billion may actually change hands.

This is because large players in the market, such as dealers and some hedge funds, have both bought and sold protection, subsequently taking both gains and losses on Lehman's default that will offset each other.

For companies with net exposure to pay out protection, much of the pain of settling the swaps has also already been taken.

"If you were the seller of protection, you had to pay collateral and that collateral was changed on a daily basis, based on where Lehman's bonds were trading," Mahadevan said.

"The money's already in the system. The loss is already in the system. I don't think of it as a big deal in terms of losses exchanging hands," he added.

The price of Lehman's bonds dropped to about 12 or 13 cents on the dollar after the investment bank filed for bankruptcy in September, meaning sellers of protection needed to post collateral to cover a loss of 87 percent to 88 percent on the contracts at the time.

Some buyers of protection would have used these bonds to settle their contracts. Others participated in an auction on October 10 to determine the value of the contracts.

When a borrower defaults on debt, sellers of protection pay buyers the full sum insured and, in return, receive the defaulted debt or a cash payment, which is determined by auction.

The October 10 auction involved 358 market players and determined the swaps were worth just 8.625 cents on the dollar, meaning sellers needed to pay out 91.375 cents on every dollar of insurance sold.

"The auction for Lehman CDS was successful and the amount that was paid out on this credit event is significantly lower than what has been mentioned in the press," analysts at Barclays said in a report.

Meanwhile, of the companies that have so far announced exposures to Lehman's default swaps, none have indicated any threat to the viability of the firm.

Genworth Financial (GNW.N: Quote, Profile, Research, Stock Buzz), for example, said it had only $5.4 million in credit default swap exposure to Lehman credit default swaps, and Hartford Financial Service Group (HIG.N: Quote, Profile, Research, Stock Buzz) said it had $30 million in exposure to Lehman's swaps.