Reply #13: Writedown bug could bite Lehman

[ozymandius]

NEW YORK (Fortune) -- Lehman Brothers has some explaining to do.

Shares of the big brokerage firm have dropped 13% over the past three days amid renewed questions about the health of Lehman's (LEH, Fortune 500) balance sheet. The setback comes just over a month after finance chief Erin Callan led a public relations blitz that aimed to dispel worries about Lehman's financial standing following the collapse of rival Bear Stearns (BSC, Fortune 500). Callan's efforts were aided by a surprisingly solid first quarter earnings report and a $4 billion preferred stock sale that was strongly oversubscribed.

But David Einhorn, the manager of the Greenlight Capital hedge fund, reopened the case against Lehman in a speech Wednesday. Einhorn, who along with any number of other value-oriented, long/short hedge fund managers is short Lehman, says the firm hasn't taken sufficient writedowns on its $6.5 billion collateralized debt obligation book to account for the sharp decline in the value of this sort of paper. Einhorn laid out his argument in a speech at the Ira Sohn Investment Research Conference.

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Of course, according to its 10-Q filing, at the end of the first quarter Lehman had $786 billion in total assets. So the decision of whether to write down a billion dollars or two could easily fall short of materiality. But it's nearly impossible to carry off an argument that the 3% haircut Lehman has taken so far on its $6.5 billion portfolio is remotely adequate. Were Lehman to seek a buyer for the entire portfolio at once, a bid of 50% of face-value might be generous. Whatever Einhorn's motivation, it appears clear that the firm's investors would do well to brace for at least one more round of asset writedowns.

http://money.cnn.com/2008/05/23/news/companies/boyd_leh...