Lehman Brothers bites themselves in the ass with credibility issues

On July 19, 2007 Lehman Brothers rejected suggestions that they are exposed to subprime problems. Many companies made statements in the summer of 2007, in part because their shock and disbelief caused those companies to say just about anything. Remember Countrywide in July 2007? But we had a problem with Lehman Brothers rejection of exposure to subprime as soon as soon as they said it. Lehman Brothers always loved subprime and companies like Household International. How could they possibly NOT be exposed to subprime, as their 2007 statement suggested?

“Between 1998 and 2000, Lehman Brothers recognized the profit potential in backing predatory lending. Investment Dealers Digest reported that Lehman had risen from third place in 1998 to become the top underwriter of residential asset-backed securities, with a total of more than $12 billion in issues in 2000. Lehman worked closely with First Alliance and Conseco Finance, and formed a relationship with Household International.” (props to Household – HSBC Watch for this.)

Some analysts say Lehman provided the financing for risky lending many years ago. Some of the companies backed by Lehman Brothers came under fire for predatory lending. How can we believe what Lehman Brothers is telling us today? Why should we believe it? Lehman Brothers net loss for the three months to the end of August 2008 is estimated by the firm at $3.9 billion (USD) – after a gross mark-to-market loss of $7.8 billion on all those unfortunate investments in residential mortgages and commercial real estate.

Let’s look at a Lehman Brothers statement from August 18, 2007. Lehman Brothers denied market rumors that it is going to take a writedown related to subprime exposure. “The rumors regarding subprime exposure are totally unfounded,” a Lehman spokeswoman said. Just four days later Lehman Brothers said: “Lehman Brothers Holdings on Wednesday said it is shutting down subprime mortgage unit BNC Mortgage Corp., affecting the jobs of 1,200 employees in 23 cities and resulting in a $25 million charge.”

Who is kidding who (or whom)? If I can see the problem as a simple analyst, certainly Lehman’s attempt to raise billions of dollars in vital new capital from Korea Development Bank failed because KDB can see the problem too. Besides, the Koreans have already been burnt by Lone Star and HSBC via Household International.

Robert Peston, the BBC’s business editor, said Lehman Brothers has run into a brick wall. We say Lehman Brothers is like the proverbial dog where the tail is wagging. The problem is that Lehman Brothers possibly bit themselves in the ass on this one. It took years, but sometimes what comes around goes around, or vice versa. We will file this article in our “Quotable quotes” section because some of Lehman’s quotes will come back to haunt them.

One thought on “Lehman Brothers bites themselves in the ass with credibility issues

  1. Lehman Bros. was an early and enthusiastic backer of subprime lending. It purchased the mortgages and used pools of the loans to back complex bonds, many of which were sold overseas. Merrill Lynch came onto the scene later.

    After the late-1990s meltdown in the subprime securitization business, Lehman stepped in with funds and other services that enabled First Alliance of Irvine to continue business in 1999 and 2000 despite lawsuits filed by state attorneys general, consumer groups and AARP.

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