Credibility Issues Haunt Lehman

Lehman's has made some extremely large property bets right at the tip of the commercial real estate bubble. Those bets are now going sour. Let's pick up the story from the WSJ article Lehman's Property Bets Are Coming Back to Bite.

The stunning $2.8 billion second-quarter loss Lehman Brothers Holdings Inc. announced Monday stemmed in part from two big real-estate investments made at high prices near the top of the market that are coming back to bite the investment bank.

Lehman joined with Tishman Speyer Properties last year to pay $22 billion for real-estate investment trust Archstone-Smith in the largest apartment-building deal ever. And in a series of projects, it teamed up with Irvine, Calif.-based land developer SunCal Cos. to develop and sell thousands of house lots to builders across Southern California. Some $1.6 billion of assets from those deals remain on Lehman's books.

On Lehman's conference call discussing its second-quarter loss and its $6 billion capital raising, the bank's finance chief, Erin Callan, said the firm had taken a "significant" write-down on its Archstone investment and the loss on its SunCal properties was "similar to other large transactions that have occurred in relevant markets." She wouldn't give the size of the write-downs.

Lehman sold a whopping $7 billion in commercial mortgage assets in the past three months. About $1.4 billion of the $3.7 billion of net losses it reported Monday from marking the value of its asset portfolio down to what it is really worth was in its commercial mortgage portfolio and other real-estate investments, including hedges.

But Lehman is still left with a commercial real-estate debt portfolio of about $29 billion, a high figure compared with many other investment banks.

Ms. Callan called the real-estate related write-downs the firm has already taken "very large" and that "gives me confidence in the actual accumulated loss" across both residential and commercial portfolios. Since the beginning of the firm's 2007 fiscal year, Lehman has taken a total of $3.5 billion in write-downs related to commercial mortgages and held-for-sale real estate.

Lehman's strategy has been to sell individual Archstone apartment complexes to pay down debt. But so far, sales have proven difficult because buyers are waiting for prices to fall further. Since Lehman announced the Archstone deal in late May 2007, apartment REIT stocks have fallen 20.32%, according to SNL Financial's U.S. REIT Multifamily index.

Lehman's other troubled deal was with SunCal to sell house lots to builders in California, including in the so-called Inland Empire east of Los Angeles, where land values have plummeted as much as 60% in some areas. Land tends to be the riskiest real-estate investment because its value can evaporate quickly and Lehman's exposure to SunCal land deals is $1.6 billion.

One troubled Lehman-backed SunCal project is McAllister Ranch, a massive master planned, residential community in Bakersfield, about 100 miles outside of Los Angeles. That project received a notice of default on a $235 million loan a few weeks ago. Lehman's exposure to that deal is now negligible because it sold off or took write-downs on most of its exposure, according to a person familiar with the situation.

Credibility Issues Haunt Lehman

Finance chief, Erin Callan would not disclose the amount of the writedowns on Archstone and SunCal. Instead Ms. Callan calls it "significant". If it is significant, why doesn't Lehman state the amount? Why not let investors decide if it's "significant" or not?

Lehman is still holding $29 billion in commercial real estate having written off only $3.5 billion. Lehman calls this "very large". I call it "peanuts". And the fact that they are hiding amounts of individual writedowns on some very bad deals they have gotten into suggests a huge credibility problem that is not going away quickly or quietly.

For more on Lehman's bad quarter please see Worst Ahead Of Lehman.

The commercial real estate mess alone suggests the writedowns at Lehman have just begun.

Underwater Already

Minyanville professor Bennet Sedacca weighed in with these thoughts this morning.

Lehman (LEH) sold 145,000,000 shares at 28 yesterday, likely to favored hedge fund clients that could flip them.

Guess what? Now LEH is under 28.

This is a sign of extreme weakness in my view and enforces my belief that the company has no handle on its business and will be forced into the hands of a larger institution.

More Signs of Extreme Weakness

When the CEO attacks shorts like Einhorn and the finance chief glosses over questions about writedowns, one can only wonder "What else is Lehman hiding?"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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