A house of Cards

By: Sid Wahi

Lehman Brothers: 1850-2008

• Global financial services firm• Core Business:

Investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking

• Businessweek: Named to 50 Best-Performing Companies in 2008

• Forecasted 2008 EPS at $7.75 or $13.3Billion

September 2007 and before:

• Lehman Bro’s has heavily invested in various SIV’s CDO’s and MBS’s.

• In 2006, 48% on the firms income came from fixed income, while 15% came from securitizations.

• Housing crisis begins to unfold as the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations

Monday, March 17th 2008

• Bear Stearn collapse: Exposure to over $10 trillion in credit default and interest rate swaps

• Lehman share price drops 39% from $39 to $24.50 after JP Morgan agrees to buy Bear Stearns

• Fed opens emergency discount window to securities firms like Lehman, something it did not do in the past

• Fed agrees to guarantee $39 billion of Bear’s doubtful positions for the takeover. (moral hazard)

Wednesday, April 2nd 2008

• Lehman raises $4 billion of capital on a preferred stock deal

• Negative signals are being sent to market, why raise capital when the firm is “well capitalized”?

• Questions are being raised about whether the firm has written down enough of its $73.4 billion of mortgage and real estate assets

• Future write downs and losses to be expected• CFO Erin Callan assures investors that the bank has no

problem financing its self in the short term. • Boy was she wrong!

Perception is EVERYTHING

“Raising capital, at a time when Lehman is trying to reduce the leverage on its balance sheet by shedding assets, suggests that additional big write-downs are coming”

Liz Moyer, Forbes Magazine

May 2008

• David Eirnhorn questions CFO Erin Callan on treatment of Level three assets (hard to value)

• “Accounting ingenuity” to avoid large scale write downs

• Short selling trend is amplified, sending Lehman’s stock down

May 2008

Monday, June 16th 2008

• Lehman Brothers posts $2.8 billion 2Q loss• Possibly due to Mr. Einhorns comments on asset

write-downs• First quarterly loss posted since the banks IPO

in1994• Markdowns on risky assets caused revenue to hit

negative $668 million from last year’s $5.51 billion.

Friday, September 5th 2008

• Lehman announces plans to dump $30 billion worth of toxic securities into a new “bad bank”, Real Estate Investments Global

• $6-8 billion would come from selling 25% of the firm to the Korean Development Bank, while $24 billion would have to come from outside investors

Friday, September 5th 2008

• Lehman is also considering selling its prized investment management arm, which includes Neuberger Berman, for about $7 billion, possibly to a private equity group like Apollo or Kohlberg Kravis Roberts.

• Splitting off troubled assets would help Lehman attract new investors, many of whom have been reluctant to put money into the troubled financial industry.

Wednesday, September 10th 2008

• Lehman Brothers announced preliminary third-quarter results that include a loss of $3.9 billion

• Lehman took a $5.6 billion write-down• Richard Fuld, CEO is desperate to raise

capital by selling off core Lehman assets • Koreans walk away from Lehman deal

Why can’t Lehman find a buyer?The Human Element

• CEO Richard Fuld has been with Lehman since 1993. Father of modern day Lehman

• Refuses to sell “lean Lehman assets” for less than it’s worth, including Neuberger Berman

• Speculation: Fuld should have taken the company private/looked for a buyer earlier

• Fed’s refusal to provide prospective buyers with a guarantee similar to that of Bear Stearns and JP Morgan adds to the problem (Moral Hazard avoided)

Thursday, September 11th 2008

• Dealbook Article: Should Lehman have gone private? (YES!)

• 1. Being private would have given Lehman time to work through its problems without having to battle off short sellers

• 2. Protection from the “Fear Trade”• 3. Going private would allow the firm to sit on its long term

loans instead of having to mark them down every quarter• Market cap on 9-11: $3Billion

Friday, September 12th 2008

• Still no Fed guarantee, hints towards private financing

• Lehman’s good bank strategy would take too long- Q1 2009

• Talks with Bank of America and other private equity firms

Monday, September 15th 2008

• Lehman file for Chapter 11 bankruptcy protection

• 25,000 Lehman employees hear about bankruptcy through media- No direct communication from executives

Wednesday, September 17th 2008

• Barclays buys core Lehman Assets, including New York headquarters and two data centers

• Move could save up to 10,000 jobs • A firm valued at $34.4 billion in 2007 had

been now sold for a measly $1.75 billion• Does it feel good to be a banker?

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