Lehman on Monday filed for Chapter 11 bankruptcy protection, ending the 158-year-old Wall Street firm's run and rattling the foundation of the global financial system.
Lehman said that it will continue business while it explores the sale of its broker and investment-management units and other strategic alternatives.
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The filing shows that Lehman is closing its doors with more than $600 billion of debt. The bank has total debts of $613 billion against total assets of $639 billion. Its filing with the Bankruptcy Court of the Southern District of New York shows that Lehman had more than 100,000 creditors.
The announcement came after a frantic weekend of negotiations in which potential acquirers backed away from a deal and federal officials balked at committing taxpayer funds to help save the Wall Street giant.
In a statement on its Web site, Lehman said the filing would affect only the parent, Lehman Brothers Holdings, and that its subsidiaries, including Neuberger Holdings LLC, would continue to operate and customers could make trades.
Let's go to the balance sheet as presented on Reuters. On their February 29 balance sheet, Lehman had $695 million of "long-term investments." By May that was $563 million. Some of the assets were probably sold. But, that's still a big drop. However, now Lehman is declaring Chapter 11 bankruptcy, which is:
Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to any business, whether organized as a corporation or sole proprietorship, or individuals with unsecured debt of at least $336,900.00 or secured debt of at least $1,010,650.00, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, while Chapter 13 provides a reorganization process for the majority of private individuals with unsecured debts of less than $336,900.00 and secured debts of less than $1,010,650.00 as of April 1, 2007.
They say they are doing this to "protect their assets" during the reorganization. But something doesn't add up here. They still have a positive book value -- unless there is a certain amount of gross value overstatements on their balance sheet. This means the value of their portfolio of mortgage related products (or any securitized product) is nowhere near what they say it's worth. That would make the most sense as to why they are declaring bankruptcy. In other words, their publicly stated books are pure fiction.
2 comments:
Sir:
I avidly read your posts on DKos and decided to seek out your blog today. I know almost nothing about exotic financial instruments and, as a freelance musician, live barely more than hand-to-mouth. Your narrative about the Lehman Bros. bankruptcy, however, is horrifically compelling. Thanks for the explication of the situation. I just wanted to ask, is it in any way "normal" for a company, _any_ company, to have debts of $600 billion before, during, or after bankruptcy. I mean, how on _Earth_ could that debt load have been allowed to build up?
Again, thanks for the work you do.
I deal with ABS/CMO/CMBS/CDO, and the problems with most of these securities is that there is no market for them, and too many of them mature in 30 or more years. A portfolio with over-exposure to these, if purchased at or close to par value, will underperform once they are written down. On the other hand, if we're talking about pieces of what Merrill had to sell for 30 cents on the dollar...at maturity, my guess is most of them will pay off well above 30.
There are just too many of them, and the market makers (Chris V - this is why they had so much of it) were left holding the bag.
The ultimate disgrace in my opinion, is that the players involved in making this nightmare a reality, are being let off the hook and in some cases (Greenspan) they're being featured on mega-news sites and progressive blogs.
Sorry about getting off track, but I'm really sick of this guy chiming in all the time and being induldged like he is. Read the transcripts of his testimony to congress during the 90s...and then after Bush took over...he was selling the concept that brought these institutions down.
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