Fortune -- which shares parent Time Warner (NYSE: TWX) with BloggingStocks -- provides a clue about how big of a write-down Lehman Brothers Holdings (NYSE: LEH) needs to take in order to account accurately for its Collateralized Debt Obligation (CDO) portfolio. By my estimate, that write-down could total roughly $4 billion -- wiping out 20% of Lehman's $20 billion in capital.
How so? I calculated $4.07 billion worth of write-downs -- $1.63 billion of the write-off is from worthless BB and below rated CDOs and another $2.44 billion is from the remaining CDOs that are worth about half their stated value. This is based on Fortune's report that Lehman has $6.5 billion worth of CDOs. The 25% that are rated BB or below it believes are worthless. The remaining 75% it figures are worth 50 cents on the dollar.
But wait, there's more. Lehman has $39 billion worth of Commercial Mortgage Backed Securities (CMBSs) which have lost value. A key index has declined in the last quarter -- but I don't know how much. Assuming the decline was 25%, Lehman would need to write down an additional $9.8 billion. If Lehman needed to take the $9.8 billion write-down plus the $4 billion for the CDOs, its capital would decline 75%.
When I think about how Lehman is not the only one to hold these dodgy securities, it becomes clear that our financial system is resting on a very shaky foundation.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
6-05-2008 @ 10:31AM
John said...
LEH is indeed going the way of Bear Stearns. If the Fed comes in to save it, it will prove that financial institutions are more equal than other companies when it comes to failure. The people in charge at Bear and Lehman deserve to be hanged for this massive fraud. Of course, if they were FORCED to pay back all the money they have cost the taxpayer and investors, that would be better.
6-09-2008 @ 7:55AM
dumbdude said...
dug, gee, d'ya think maybe they lied when they reported a Q1 profit of $489MM w/minimal write-downs they day after Bear blew up to save the firm? d'ya think it's a little funny LEH's "first quarterly loss in history" is coming a little late here?