Lehman (and most human-capital oriented businesses) only have value as a going concern. All the clients and counter-parties of Lehman are now doing business with someone else. Take away the people and the clients and there is no way to pay the senior debt holders, let alone shareholders.

As for the whole thesis, I guess it doesn’t stand my smell test – hundreds of lawyers are pouring through the filing as we speak. If I were a lawyer for another creditor, LEH selling CDS on itself would be something to object to – certainly I would view it as suspious, probably criminal (you are accusing LEH of conspiring pre-bankruptcy to transfer assets post-bankruptcy to a different party). The fact that this has surfaced, but lots of other more mundane issues have makes this look like a non-issue AFAIK.

ROYT “Robert: We shouldn’t expect to see if Lehman had written any specific amount of CD swaps on itself, ”

Evidently zero is not a specific amount. I guess any such doesn’t mean “any self CDSs” but “enought self CDSs to drive liabilities up to 1/0.12 times assets.” This forced interpretation would imply that ROYT has not fallen into contridiction. It seems to me impossible to understand why the word “any” was included in the earlier comment under the interpretation which makes the two comments other than contradictory. It is necessary to argue that “didn’t have .., any” means something other than “had zero” and that the word “any” was superfluous. No big deal in any case (it’s a comment not a contract).

ROYT is also unclear on “required” which would normally mean “legally required” but evidently not in this case.

More importantly, concentration, as described in the 10-q refers to concentrated counter party risk which could cause bankruptcy. Self insurance can not cause bankruptcy as it only implies liabilities after bankruptcy.

If Royt wants to argue that Lehman’s 10-Q is inconsistent with the amount of self insurance which I discuss (as a conceivable possibility) he or she would have to divide dollar fair market value of such liabilities by the market price of insurance of Lehman debt as of May 31 2008. I would guess that this would give a very high face value.

ROYT’s argument, in the end, is that a serious accounting firm would have drawn attention to anything horribly bad for bond holders (even if the only reporting is in a section of the 10-Q which clearly says “not audited”). If so, how can Lehman debt be selling for 12 cents on the dollar ? Something went grossly wrong. Whatever it was, if the auditor could detect the possibility (ROYT’s assertion) then the auditor should have warned.

I mean why doesn’t ROYT’s argument against the hypothesis prove that Lehman’s debt isn’t trading for its current price ?

As Garrett Hardin remarked later, he should have named the essay “Tragedy of the Unmanaged Commons”

Owning a market, or a bull, requires having a good fence. Otherwise you have a free market, or a free range, and nobody has much of an idea who owns what after the stampede has happened.

First they invented branding irons, but those were easy to fake.
Then they invented barbed wire.

Surely the financial industry can do as well as the cowboys.
Eventually.

Maybe not fatal, but surly HH’s statement provides insight into one of the major insights of decision-making theory, i.e., that seemingly rational decisions made at one level of bounded rationality often paradoxically produce irrational results at the level of larger systems “en grosso mondo.”

Seems pretty analogous to the Tragedy of the Commons…

And Right, not continuous. Quarterly for public cos. But the immediate establishment of such a position in-between reporting periods would likely be a hard thing to hide from other players and might well be mentioned in the business press (and necessitate an interim SEC disclosure as well). There really are a lot of good reasons why one would not expect Lehman or others to attempt a “play” like this…

Robert: We shouldn’t expect to see if Lehman had written any specific amount of CD swaps on itself, but we would expect to see disclosure of positions material enough to have the specific consequences that were originally under discussion.

JT: If you’re hearing an argument from me that companies never either err or intentionally misstate results, you’re hearing something I didn’t say.

We could use this argument to claim that Enron reported everything correctly. As it turned out, Enron instead had disastrous results.

So, did Lehman Brothers do entirely correct reporting in order to avoid disastrous results? I guess we can wait and see….

I quote

“Fair Value of Derivatives and Other Contractual Agreements”
this includes credit default swaps as liabilities. They are booked at current market value. This is not relevant.

It also appears in a section entitled

“LEHMAN BROTHERS HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)”

There is another entry about credit default swaps with SPE’s again in (Unaudited). Again just amounts at fair value. Nothing about the correlation with bankruptcy of Lehman brothers and typically in unaudited notes.

I don’t see how I can tell if Lehman wrote CD swaps on its own debt from this document (but I repeat I am ignorant).

Thanks Royt. I admit I am fairly ignorant about accounting standards and don’t know what is in the Lehman May 31 10-Q. Could you provide a link ?

This seems relevant
“SEC Info – Lehman Brothers Holdings Inc – 10-Q – For 5/31/08 – E”…
is
http://www.secinfo.com/d11MXs.t1C1k.c.htm seems relevant

I search for concentration
I get “Concentrations of Credit Risk
[snip] The Company’s exposure to credit risk associated with the non-performance of these clients and counterparties”

Not relevant. That is risk related to Lehman assets not liabilities.

something in a section on valuing securities which is not relevant

“geographic concentrations” (not relevant)

more on concentration of assets (not relevant)

something on risk management thinking about concentration (not relevant)

Concentration appears to be a word related to assets and counter party risk. It has nothing to do with Lehman liabilities which require payment only if Lehman defaults on its debt (the topic of my post).

The word “materiality” does not appear in the 10-q report entitled “Lehman Brothers Holdings Inc · 10-Q · For 5/31/08”

I’ll keep looking

I asked above, Why would CDS positions such as have been theorized by Waldmann (and further speculated upon here) be required to be disclosed? One answer is, Materiality. Another is Concentration.

Lehman did not, in a recent reported quarter-end have any such position. We know this because we can read their May 31 10-Q. We can peruse their footnotes for extraordinary transactions (which E&Y would surely have regarded these as being), we can search the MD&A, examine disclosures on liquidity and concentration… in vain.

As an example, if your company is working for Ford or GM, you may be on the hook for a significant amount of revenues, both as A/R and future work from these companies. Should they go bankrupt, your firm is very low on the creditor list and could cause you to go under. Buy some protection against your biggest customers and you may live if one of them goes under. Buying a CDS from Lehman was easier/cheaper than the alternatives (shorting debt, factoring future receiveables).

That investment banks set their compensation system up to reward people for 12 months revenue generation without regards to risk is pretty silly. I’d say the owners of the stock were stupid, except employees tended to own 25-30% of the stock.

It seems to me the problem was NOT that Banks didn’t understand these exotic instruments (which they indeed did not) but that they indeed thought that they understood them very well. “Too clever by half” is the phrase the British would use, I believe.

Maybe not fatal, but surly HH’s statement provides insight into one of the major insights of decision-making theory, i.e., that seemingly rational decisions made at one level of bounded rationality often paradoxically produce irrational results at the level of larger systems “en grosso mondo.”