I was hoping somebody could clear this up for me--I'm having trouble understanding what all the potential losses are that are preventing BofA or Barclays from snapping up Lehman (I also didn't really understand the same thing when this happened with Bear)--
the way I understand it, Lehman has $30 bn of troubled mortgage related assets on their books. They may have to take writedowns on these because of defaults on the underlying mortgages. But how does that translate into real risks for a potential buyer?
Let's say that BofA makes a $4 per share buyout of Lehman (so I think thats roughly $4-5 bn in equity). Now on top of that, let's writedown the $30 bn of MBS to 0. As long as the entire rest of Lehman is worth >$5bn, how could this possibly be a bad deal for BofA (ie, how could they actually lose money, not just have to write down the credit assets)? What am I missing here? Is there something to do with capital requirements or are there liabilities that these assets pay to (so that loss of the assets leads to negative equity)?
Bump excellent question. What are the accounting issues here?
equity = asset - liability
a potentially huge liability can make the equity worth
From the article:
"Both Bank of America and Barclays remain fixated on the disposal of the bad real estate assets, and are less focused on evaluating Lehman's investment bank, said one person involved in the due diligence process."
http://online.wsj.com/article/SB122134089502132567.html?mod=hps_us_what…
Reading the article, I think the concern is around Lehman's real estate portfolio, not its CMBS or MBS securities, which I think have been heavily written down already. I know LEH has a real estate private equity division, so perhaps $85B in bad real estate assets are from their direct PE real estate investments? Not sure though.
untilted, that makes sense, but it still doesn't answer my question, which is how is it that these real estate "assets" can be liabilities? ie how can they cause the bank to actually LOSE money (as opposed to just paying out less than the securities promise to)?
ps catman, i'm fairly certain that when wsj says real estate assets they're actually referring to securities, not actual buildings.
The writedown would hit the P&L which would reduce equity (through retained earnings)?
What are these "Off balance sheet" transactions? Does that mean that they were never on the statements as assets or liabilities? Would they only show up if a write-down ocurred on the income statement? Are securitized products off balance sheet?
bump, more information would be nice.
I have looked over both the press release and the supplemental information and i have a couple questions. I cannot find the above referenced 85 billion in bad real estate investments. Is this something that would be off balance sheet or what i am referencing below.
Res Mortgage 17.2 bn Com Mortgage 32.6 bn Other ABS 4.6 bn Acq Finance 10.4 bn
Total 64.8 bn
to monkey147, off balance sheet means that the securities are stored in a separate entity (ie a conduit or SIV or something); and in those cases, yeah, it's not on the parent corporations balance sheet. there are FASB regulations (fin46?) as to when an offbalance sheet vehicle has to be brought onto balance sheet, but I do think that writedowns help to trigger some of the provisions...
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