When will Lehman take $4 billion in CDO write-downs?

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.