Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Dave Sherr

Size of Lehman Brothers Bad Assets

Lehman Brothers is dying and effectively dead. In the next few hours the world will learn whether there is some type of forced rescue or whether this investment bank will be the first major institution that is "too big" and yet allowed to fail. The consequences of that failure are likely to rattle the markets in the United States, Europe and the Far East.

The Wall Street rumor website Dearlbreaker has a posting from early Sunday morning September 14th 2008 entitled We Have Reached A Deal For Lehman, Sources Say. That article starts, "We understand that a deal has been reached to divide Lehman Brothers into two entities, with a "bad bank" taking the toxic, real-estate assets amounting to around $85 billion. The deal will be financed without any government backing. Lehman chief executive Dick Fuld will resign."

Toomre Capital Markets LLC ("TCM") has watched the Lehman Brothers story evolve with some interest over the past year. This $85 billion number is far greater than Lars Toomre ever recalls being talked about before.

If this figure of bad assets is indeed accurate, Dick Fuld, Joe Gregory, Ted Janulis, Dave Sherr and all of the rest of the Lehman Brothers senior management (past and present) truly deserve to be taken out drawn, quartered and then shot. Where did this amount of "bad assets" come from?? My impression from all of the talk of liquidations is that were something on the order of $30 billion in troubled real estate holdings. If there truly was almost three times as much, that fact was not clearly communicated to the market participants. And if it was communicated, let me then repose the question, "Where the heck were Lehman Brothers' enterprise risk management controls that allowed the mortgage department to build such enormous positions???"