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Thursday, March 27, 2008

The "run" on Lehman

Lehman keeps telling the marketplace that they have a ton of liquidity, and they have stress tested their balance sheet when market conditions seize up. But can anybody read their balance sheet?

We can read a 10-K, and we can look at Lehman's Level III assets. Here's what Lehman has to say about their Level III assets:

Level III – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Remember assets that are marked-to-market are Level I. Mark-to-model is Level II. Mark-to-myth is Level III.

Anyone wonder how Lehman is doing with their mortgage and asset backed assets that are marked Level III? They've been accumulating them! Maybe they are "hoarding" them because Lehman feels they cannot trust the market's judgement of it's value, or the opportunity they represent.

So the market should trust Lehman, and trust their CFO. New Yorker's don't even trust their government leaders. And if the CFO dresses like one of Eliot Spitzer's girlfriends, they won't give her a pass even if she has a nice, flattering profile in the business press. But she'll be able to deflect the questions that the hedge fund boys won't ask!

But Wall Street isn't sexist because she's pretty. It's not that she has a proclivity for wearing revealing clothes, but that her firm keeps their assets hidden! Look at these figures from the 10-K.

On December 1, 2006, Lehman had $8.575 billion in Level III mortgage and asset backed positions.

On February 28, 2007, Lehman had $11.157 billion in these Level III positions.

On May 31, 2007, Lehman had $12.876 billion in these Level III positions.

On August 31, 2007 Lehman had $23.791 billion in these Level III positions.

On November 30, 2007 Lehman had $25.194 billion in these Level III positions.

And that's the Lehman story. It's the steady accumulation of assets in the mark-to-myth category.

Which is why the shorts are "raiding" the stock and spreading "rumors."

Maybe Erin Callan can quiet them.