7 Lehman's Valuation of Its Assets The purpose of this chapter is to examine the whole issue of valuing Lehman's assets. This is a more complex subject than it may first appear. The way in which Lehman valued its assets has to be set in the context of the way in which assets were or should have been valued at the time. The reasons for the market's lack of confidence in Lehman's valuations are explained in this chapter. The kind of regulations governing valuation in force between 1994 and 2007 are set out here. None of these applied to the Big

in Lehman Brothers
Open Access (free)
A Crisis of Value

This book explains the fundamental causes of the bank's failure, including the inadequacy of the regulatory and supervisory framework. For some, it was the repeal of the Glass-Steagall Act that was the overriding cause, not just of the collapse of Lehman Brothers, but of the financial crisis as a whole. The book argues that the cause is partly to be found both in weak and ineffective regulation and also in a programme of regulation and supervision that was simply not fit for the purpose. Lehman Brothers' long history began with three brothers, immigrants from Germany, who sold selling groceries and dry goods to local cotton farmers. Dick Fuld, the chairman and CEO, and his senior management, ignored the increased risks, choosing to rely on over-valuations of the firm's assets. The book examines the regulation of the Big Five investment banks in the context of the changes which took place in the structure of banking after the repeal of the Glass-Steagall Act. It describes the introduction of the European Union's Consolidated Supervision Directive in 2004. The book examines the whole issue of valuing Lehman's assets and details the regulations covering appraisals and valuations of real estate, applicable at the time and to consider Lehman's approach in the light of these regulations. It argues that that the valuation of Lehman's real estate assets was problematic to say the least, as the regulators did not require the investment banks to adopt a recognized methodology of valuation, and that Lehman's own methods were flawed.

paid to transfer a liability in an orderly transaction between market participants at the measurement date’. It allows for ‘usual and customary’ transactions and does not apply to forced sales. These constitute Level 1 valuations, according to the hierarchy of values created by SFAS 157. Level 2 valuations are those requiring other inputs besides the market price, which may not always be available. Such inputs could include quoted prices for similar assets or liabilities in active markets. More importantly, given the markets in which Lehman

in Lehman Brothers
Open Access (free)

8 Measuring Value Previous chapters have set out the ways in which Lehman Brothers sought to value its assets and to hide its losses. Professional standards for the valuation of commercial and residential real estate existed at that time, but as the bankruptcy Examiner Valukas demonstrates in his report, Lehman showed little interest in conforming to them or hiring those who knew how to apply them. Against that background it can be seen that the bankruptcy process did not itself cause the destruction of value, although it

in Lehman Brothers
Open Access (free)

the mandatory provisions of legislation governing the distribution of an insolvent debtor's assets. These principles affected the way in which the bankruptcy was handled and the valuation of the derivative contracts. The procedures, where one or other party defaults, require the termination of all contracts, which triggers the unwinding of all open contracts governed by the Master Agreement. Then the value of all contracts must be determined. The amounts owing or owed on individual transactions should be netted off to arrive at an aggregate sum

in Lehman Brothers
Open Access (free)

with Lloyd Blankfein (Goldman Sachs), Jamie Dimon (JP Morgan Chase) and John Thain (Merrill Lynch). Paulson knew that if Lehman Brothers collapsed, Merrill would be the next to go, as it had a weak balance sheet. The next meeting with the Bank of America was fruitless, as their deal team had unearthed yet more bad assets, totalling between $65 and $67bn, including $33bn of commercial mortgages and real estate and $17bn residential mortgage-backed securities. They believed that Lehman's valuation of its own commercial real estate positions were too

in Lehman Brothers
Open Access (free)
January to September 2008

rating, which was defined as ‘a composite credit rating for the pledge collateral based on ratings information used by the borrower's clearing bank’. But the Federal Reserve's acceptance of the clearing bank's valuation of the assets offered by the investment banks and others was marred by the fact that the clearing banks held similar assets themselves. Willem Buiter, now Chief Economist at Citibank, commented: This arrangement is an invitation to primary dealers and their clearers to collude to rip off the

in Lehman Brothers
Open Access (free)

high-risk investments. In other words, the objectives of the fund in which individuals invest has to be taken into account, but Woolley and Vayanos identify only two: fundamental investing, which uses estimates of cash flows to determine the worth of assets, whereas momentum investing disregards valuation and simply rides the trends usually over the short-to-medium term … Bizarrely and damagingly, the rise in momentum investing means that the bulk of equity investment is now conducted without regard to

in Lehman Brothers
Open Access (free)
Crisis, reform and recovery

Corporation to deal with the assets of the failed Savings and Loans Associations, FRA’s task was: (1) to review the rehabilitation proposals of the 58 suspended finance companies; (2) to assist bona fide depositors and creditors of the suspended companies; (3) and to administer the liquidation of companies whose proposals were rejected by FRA – hopefully, by returning the non-performing assets to the marketplace at market-determined valuations and prices. FRA was given one month to assess the plans submitted and to make a recommendation to the ministry of finance on how many

in The Asian financial crisis
Open Access (free)
Crisis, reform and recovery

be seen if the “big deal” concept reduces the surplus capacity or improves competitiveness. Negotiations have been plagued by sharp differences over the valuation of assets, problems about how the different operations can be 233 The Asian financial crisis effectively integrated, and uncertainty over the final corporate form the new entities would take. Also, the proposed swaps will require huge public funds to enable creditor banks to swap debt for equity, and therefore have the potential of “giving the chaebols back door access to public funds to reduce their large

in The Asian financial crisis