naked capitalism

We’ve taken the liberty of designating the biggest money pits of the financial crisis as “black holes.” And one the characteristics of black holes is that anything that crosses the so-called “Schwarzschild radius” does not escape. That means that it is impossible to obtain any information from inside the Schwarzschild radius.

That feature seems particularly relevant as far as AIG and Lehman are concerned. With AIG, there has been no interest in ascertaining why a bailout that was supposed to total $85 billion, max, was retraded four times, with the amount going to AIG rising each time. By contrast, as we have pointed out repeatedly, UBS was made by the powers that be in Switzerland to explain in detail why it needed a rescue.

For Lehman, despite the voluminous so-called Valukas report, prepared by the bankruptcy examiner, the biggest question remains unanswered. How could an investment bank that sported a positive net worth suddenly show such massive losses? Even Lehman skeptics were stunned at the magnitude of the losses.

As we noted before, Repo 105 and the hasty bankruptcy are not sufficient explanations:

But the numbers do not add up. The bankruptcy administrator has put the losses at $130 billion (although that number is still in play) and was (remarkably) denying that Lehman had a solvency problem at the time of its collapse, when the tenor of the Government section suggests the reverse. In addition, Lehman’s net worth as of May 31, 2008 was reported at $26 billion. So if we accept the $130 billion estimate, the swing from reported net worth to losses realized was over $150 billion. We still have no satisfactory explanation of how that took place. The bankruptcy administrator, Alvarez & Marsal, blamed some of the losses on the “disorderly collapse”, but assigned “only” a maximum of $75 billion. We do not know the composition of the value shortfalls that led Lehman to play Repo 105 games, which presumably totaled $50 billion (some sus items have been singled out, but that falls short of an explanation). So not only do we lack a decent explanation of that $50 billion, even if we accept the high end of the Alvarez & Marsal estimate, we have an additional $25 billion missing in action.

Reader Hubert, in comments yesterday, voiced continued frustration with the lack of an explanation for the magnitude of Lehman losses and thought the Naked Capitalism community might come up with answers:

Maybe we can do some open source algebra to bring some light into the biggest financial crime ever:

A+B+C = D

A) Equity Lehman 20 bn
B) Loss to subordinated debt 150 bn
C) Money stolen from London prime brokerage counterparties: 15 bn
D) damage in total: 185 bn
(all my estimates, from the hip) [Yves comment: A was $24 billion, latest loss estimates I've seen from official sources is $130 billion. So I'd put D at $170 billion]

Now in accounting identities, we will have to find responsible business lines where the losses might have occured. Unfortuanately tho other side is more convoluted:

D= E + F + G + H + I + J + K + L + M + N + ………..

E) Losses on Residential Mortgage Bonds/CDOs 20 bn ?
F) Losses on Leftovers from Pipelines of their mortgage origination subs x?
G) Deficiency in Assets presumably sold but whoops, maybe not: REPO 105 – max 58 bn
H) Commercial Real Estate in various forms (Archstone ….): 20 bn
I) Money stolen by Barclays – 5-10 bn
J) MOney stolen by JP MOrgan 3-8 bn
K) Money stolen by various other Derivative counterparties ????
L) Bankruptcy court and lawyers, 1 bn counting – let´s say 2 bn
M) Hot Air In LEH Derivative Book ?????
N) Neuberger Berman – 2,6 on book – appraised for 8 bn, sold for 1 bn – loss 1,6 bn.

E – F – G might be very well interconnected
G depends on quality of “REPO” assets. My guess: 20 bn – might or might not be included in E and/ or F.
All has to add up to 185 bn and I have trouble reaching 100 bn.

The solution of this riddle might bring quite some jailtime for Dick Fuld – that should be enough motivation to bring it along.

Yves – for the sake of earthly justice – would you motivate your readers to join in this endeavour ?

Yves again. I’m pinging some readers and fellow bloggers who might take up this challenge. Anyone who has insight (as to any adjustments might be needed to come up with a better estimate of the size of the hole and what its constituent elements might be) PLEASE comment!