Lehman Valuation Problem

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jaxbmw
Posts: 20
Joined: Sat Aug 16, 2008 6:45 am

Lehman Valuation Problem

Post by jaxbmw »

The more I look at what is happening to Lehman and the other financial companies the less I UNDERSTAND what is happening.

Maybe someone can help me see their problem better.

I was looking at their income statement, balance sheet and ratios.

On the one hand I see that Lehman has a price to book of .12. This would seem to indicate they from a book value perspective they are dirt cheap. Then I look look at their cash position and see that they have over 540B. On their balance sheet there is a large drop in long term investments from Feb to May. I am assuming that this is where they are carrying mortgages and other financial paper?

So if they cannot market or set a value for their long term investments, their assets drop and this is what is happening?

just trying to understand this mess.
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docneil88
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Re: Lehman Valuation Problem

Post by docneil88 »

jaxbmw wrote:On the one hand I see that Lehman has a price to book of .12. This would seem to indicate they from a book value perspective they are dirt cheap.
The market doesn't trust LEH's book value number right now. Their portfolio is so large, so leveraged, and in so many complex instruments (many with built-in leverage, e.g. CDOs) that the stated book value is very suspect as a measure of the company's value. According to yahoo finance the debt to equity ratio for LEH is 14:1. When you have that kind of leverage, slight mistakes in valuation methods are amplified 14X when figuring the book value.

Does anyone know to what degree LEH is using mark-to-market accounting on its portfolio? If liquidity has completely disappeared for a certain holding, then how does mark-to-market accounting work? Would zero be used, or would a comparables approach be used like in real estate? Thanks in advance. Best, Neil
hello77
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Joined: Wed Jul 09, 2008 9:03 pm

Post by hello77 »

In the news, a number of 80 billion of what are called bad assets is not shown on the lehman books; the number actually kept varying as negotiations continued over the weekend(first 30 billion, then 50 billion, then 80 billion). If you take the 80 billion number; lehman has more liability than assets... and Lehman may even have more than 80 billion of bad assets. The fact the bad assets initially started at 30 billion and went to 80 billion during negotiations shows there is some creative accounting going on...at least imo...who knows what lehman is really worth; but i know its less than the value of its assets (not talking bad assets)otherwise bofa or barclay would of bought it.

Basically, lehman is overstating the value of its assets on its balance sheet; that is what i think is happening....and its to late to try and correct it.
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