Lehman May Put $32 Billion of Dubious Debt in "Bad Bank"

Although there have been rumors of various Lehman Hail Mary passes (the number of companies allegedly interested in investing in the troubled bank seems to grow on a daily basis), the one involving it spinning off less than choice debt into a liquidation vehicle appears to have some substance. A Bloomberg story today gives details that suggest, at a minimum, the idea has been fleshed out in some detail.

Lehman-watchers will no doubt find the provisional name of the new entity a tad Freudian: Spinco.

From Bloomberg:

Lehman Brothers Holdings Inc. may shift about $32 billion of commercial mortgages and real estate to a new company that will be spun off in a move similar to the good-bank-bad-bank model used in the 1980s banking crisis…

The bad bank, nicknamed Spinco for now, would have about $8 billion of equity coming from Lehman, the people said, speaking on condition of anonymity because the plan is one of several under consideration. Spinco would borrow the remaining $24 billion from Lehman or outside investors. The New York-based bank would replace capital put into Spinco, whose shares would be owned by current Lehman shareholders…

The Spinco proposal would enable Lehman to dispose of 80 percent of its commercial mortgages, the people said. Under another plan, the firm would establish a company capitalized and managed by outside investors to buy some of its mortgage assets. The Spinco plan would enable Lehman’s shareholders to benefit from a turnaround in the mortgage market…

Lehman’s $65 billion mortgage-related portfolio has spooked shareholders…The bigger portion of the portfolio, or $40 billion, is tied to commercial real estate.

Even though defaults of commercial mortgages are still below 1 percent, speculation that delinquencies will jump in that market has pushed down the prices of the bonds backed by commercial real estate loans.

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  1. doc holiday

    JEDI 4

    This is too funny, take the problems off the balance sheet and then use the debt as leverage to buy back shares and then increase options for insiders…ROTFLMAO!

    We need more entities!! What about a bumper sticker/t-shirt contest to name this entity?

    1. Dumpco l

  2. doc holiday

    How about a more modern movie theme, like Babylon, which would help LEH take advantage of the latest FASB delay to deal with consolidation and QSPEs.

    Re: The proposals would amend FAS 140 to require public entities to provide additional disclosures about transfers of financial assets and also amends FIN 46(R) to require public enterprises to provide additional disclosures about their involvement with variable interest entities.
    FASB in April agreed as part of these rewrites to eliminate the Q, an accounting device that has come under much criticism over the past several years, with critics saying the practice has contributed to corporate scandals such as Enron by allowing losing or volatile positions to be obscured.
    FASB Chairman Robert Herz himself has connected Qs to the sub-prime mortgage crisis, telling a joint meeting of FASB and its European counterpart, the International Accounting Standards Board, that the vehicles into which riskier loans had been packaged were “ticking time bombs.”
    But the American Securitization Forum and the Securities Industry and Financial Markets Association wrote FASB in late July calling for a delay of the latest rewrite attempt.
    Arguing that the FASB rewrite would be “likely to swell the balance sheets of the affected entities, impairing financial ratios and financial covenant performance and regulatory capital tests,” the two groups called for a “more measured and realistic but still aggressive deadline (such as Jan. 1 2010).”



    Re: Enron created Chewco as a limited partnership which would help keep the JEDI project off its books. It wanted to buy out the California Public Employees’ Retirement System’s interest in JEDI, but it did not want to be forced, by accepted accounting principles, to consolidate JEDI in the Enron financial statements and thus reflect debt and/or financial losses. Enron wanted to keep JEDI afloat, but it needed a partner to take at least a 3% stake, or the partnership's results would have to be included in Enron's financial statements. Chewco was created to be that partner.

  3. leftback

    SPINCO might be the first IPO in which short interest outweighs bids – by about 30:1

    Seriously, is this something the SEC should even allow to happen? I know there is a new fool born every minute but even that supply must be limited.

  4. Paul

    Wow, I sure wouldn't want to be writing their D&O liability policy. This plan might as well be stamped 'asset stripping' across the front of it. They're just begging for lawsuits. (I wonder if AIG has written the D&O policy?)

  5. Matt Dubuque

    What seems highly likely is that the executives of “Spinco” would be highly compensated.

    In a spirit of sharing with some of the very bright minds in this group, most certainly Yves, I’m coming to the belief that there is a growing and material (i.e. substantive) chance that the Fed would NOT bail out Lehman Brothers.

    Clearly not the consensus view, but I think there are clear reasons to justify this position.

    And that could account for some of Lehman’s urgency in these negotiations.

    This scenario would envision the Fed having told Lehman two months ago that if the markets are stable in January (which I personally believe is quite unlikely) that the Fed will actively consider letting the markets have their way with that firm.

    Matt Dubuque

  6. dh


    Is something weird unwinding here??

    Bond insurer CIFG close to deal on derivatives
    http://www.guardian.co.uk/busine…article/ 7769626

    CIFG, which is based in Bermuda, an offshore insurance market, said it has tentative agreements that would let it cancel about $12 billion in guarantees on collateralized debt obligations in exchange for an undisclosed amount of cash and equity.
    Banque Populaire and Caisse d’Epargne, which together own French bank Natixis SA, took over control of CIFG from Natixis last year, in a bid to boost capital.

    “Natixis SA, France’s fourth-largest bank, will sell shares for 61 percent less than its market value to raise 3.7 billion euros ($5.4 billion) after writedowns related to the U.S. subprime contagion depleted capital.”

  7. Stuart

    Besides being proven once against to be the purest form of pigmen fraudsters, naming the new company “Spinco”…. are they that friggin’ stupid too?

    You couldn’t make this up. Create effectively a subsidiary to try and dump your toxic trash into, try to lure other suckers to invest in it and call it “Spinco”. Who the hell is running this company, Jay Leno????

  8. Anonymous




    perhaps they can Bill Gross’ proposed agency, the Deceit Resolution Corporation

  9. S

    What this says is that they are willing to ssacrifice $8B in capital to get the $30 plus into a vehicle. This basically tells you that the effective book value is $16-17 versus the touted $30. It also confirms what the anonymous KDP gov regulator said in that the company is completly insolvent. I know this isnt a new revelation, but it is fascinating that having been completley picked over by the world over (literally) the garbage barge comes back to port to dock. There was a waste barge some years ago that simply sailed around with no place to go.

    I still want to know why Dick Fuld is on the Board of the NY Fed. He should either be asked to resign immediatly or thrown out. And if he makes a sound he should be read his rights. This for the untimely statments, repeatedly, about the companies liquidity position whcih were outright lies. Then the repeated leaks. Gasbag should be put on the stand.

  10. Anonymous

    What I find interesting is the haste in which they are doing this. Sept.12 a deadline, why? Seems to me they want to include this into their earnings report to hide the other cr@p going on.
    If they are deficient in capital due to a loss, aren’t they supposed to inform the regulators at once rather than raising the capital then marking their loss, net effect zero? Weren’t they supposed to be marking as at Aug 31, not two weeks later after they covered with capital? how do they get away with it?

  11. S

    they cower under the systemic risk excuse and then they leak a story to CNBC that of BS went down it wuld have taken LEH, MER, JPM and MS. Stir up some fear TBTF. Then presto everyone looks the other way while they deficate on the US taxpayer. Fuld maybe even lobs a call into NY Fed and calls Jamie D, the other rotating head, for some advice. That is the way it works.

  12. Stuart

    By trying to rush this through before the 12th, they can’t honestly believe people won’t see through the reasoning behind this haste, let alone through the entire scam in the 1st place. If they do, and it’s a big if, one can only stare in astonishing at the audacious level of self-deception they have in believing they can get away with yet another fraud. How stupid do they think the planet is….

  13. Anonymous

    Oh and another thing….

    The latest theme–“Good Bank/Bad Bank;” why isn’t anyone taking that to task?!?!?

    Why “Good Bank/Bad Bank?” Why not “Profit Bank/Loss Bank,” “Good Positions/Bad Positions,” “Cherry picked/Non-cherry picked,” “88888 account/00000 account,” etc….

    Ok, let’s put all our good investments in one account and pretend that’s the only that matters and the cr@p in another and pretend it doesn’t exist unless it makes profits. How do they get away with it?!?! And what of their credit ratings? They get two? Good Bank-AAA, Bad Bank- CCC? Just as ridiculous!

  14. Anonymous

    Re: How stupid do they think the planet is….

    Maybe this is the type of logic The Fed used when it bailed out Bear!! LOL!

  15. Kidder Reports

    The name ‘Spinco’ must be Lehman’s idea of due diligence. If you are willing to put your money into a company named ‘Spinco’, we wish you “good luck!’ and hide our gleeful smirk.

    By the way – what ever happened to the suitability rule? In short, don’t sell stuff to an investor unless it fits his/her needs and circumstances.

    Good rules like suitability already exist on the books — but the trouble is they haven’t been honored or enforced. Robert Milken showed the Wall Street puppies how to can sell paper called ‘junk.’ The key to selling trash — then and now — is the inducement to portfolio manager. Oh dear — did I pull a punch by not writing improper inducements?

    Never mind! I know the suitability standard is ancient history and may not apply in the case of LEH dumping its trash onto willing foreigners like the Koreans. In any case, the take-away from Milken’s tennis camp adventure was this:

    There is no lasting penalty for doing “what it takes” to sell ‘bad paper’ to widows, orphans and Koreans. Milken show the boys that, if in the unlikely event you are caught and prosecuted, then you will be treated by the WSJ as a martyr, you will keep most of the money, and you will live live to play again!

    But think about this: if the suitability standard had been maintained over the past 20 years, would the Wall Street be in the present mess?

  16. Anonymous

    is “Bad Bank” some metaphor for the ECB?

    “Banks reel as ECB redraws funding rules”



    “Bank stocks in Europe and the UK fell sharply and the risk of owning their debt leapt on Thursday after the European Central Bank declared a crackdown on abuses of its bank liquidity operations. “

    “This year it emerged Macquarie Bank had constructed a deal backed by Australian car loans that could be used at the ECB and Lehman Brothers had formed a huge collateralised loan obligation of risky buy-out debt to use at the central bank.”

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