Monday, September 15, 2008

Lehman's Story

From Marketwatch:

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.


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.