Not sure about the logic behind your leverage ratio, mind explaining
it a bit? 64 is extremely high, even for a hedge fund. Remember the
two Bear funds that went under, the higher of the two had a leverage
ratio of 15.
I don't think Lehman should be put into comparison with CFC, CFC is a
lender which holds most of the subprime risk, and Lehman only sells
MBS to investors, even if the last trench is not sellable, it is not
Lehman that takes on the risk exposure.
Also, given the level of sophistication in risk managment nowadays,
the risk exposure to subprime would be well hedged by now.
The 44% stated in CNN regarding to Lehman's portfolio was not clearly
defined as to wether if it's Lehman's ENTIRE investment portfoilio or
a specific buiness sector, it could just be Lehman's Prop desk, or
FICC. Therefore, the 451billion should not be used in your equation.
bookr
...@yahoo.com wrote:
> Consider the following data points:
> Lehman market cap is 28.40B, balance sheet shows 451B long term
> investments, 280B short/current-long term debt, 124B long term debt,
> 80B payable and current liabilities, 28B receivable, 12B cash, 18B
> equity, 15B net tangible assets. What is their leverage based on
> this? Damn good question. I would say 451/(451 - (280 + 124 + 80 -
> 28 - 12)) = 451/7 = 64:1. Another way to calculate is as 451/15 =
> 30:1. Whatever the exact number, it is very high.
> 44% of Lehman's portfolio is in mortgage-backed securities (source:
> http://money.cnn.com/news/newsfeeds/articles/newstex/IBD-0001-1882647...)
> Countrywide said that 20.15% of their subprime and 3.70% of prime
> loans are delinquent, or an average of 4.98%, a big increase from last
> quarter (source: http://www.reuters.com/article/marketsNews/idUKN0927223520070810?rpc=44).
> What happens to Lehman if their mortgage-backed portfolio drops by
> 5%? Let's see... 5% * 44% * 451B = 9.9B loss. That's a loss of half
> their equity or a third of their market cap, basically. What if the
> drop is 10%? You get the picture.
> But wait: actually, things may be much worse than that. When CDOs are
> created, someone has to hold the lower (non-AAA, "toxic") tranches.
> Everyone who was in on the game was certainly scrambling to dump those
> on pension funds and the like, but given the sheer volume of new
> mortgages and CDOs created until recently and the abruptness with
> which the market seized up, they are now probably holding a
> considerable amount of those on their books. Those tranches are the
> ones that take any hit from defaults first - that's why the rest can
> be "AAA" (yeah right). That of course also means that the lower
> tranches are also completely wiped out by even a 5% loss. Another way
> to think of it is that they are leveraged at a 20:1 or so to any
> downside in the mortgage market. Now, what do you think happens to a
> company which is holding lower tranches of CDOs as a sizeable portion
> of their 451B, 30:1 leveraged portfolio? Which is now leveraged
> essentially at a 30:1 *times* a 20:1 to any potential downside?
> Yes, exactly: it starts with a B and and ends with a Y.
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