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September 26th, 2007

When the Wall Street Wizard couldn’t unload his mortgage backed securities anymore, he started to scrap bits and pieces his weirder paper generating machinery:

Finance America: Gone

BNC: Gone

Aurora Loan Services: Uh, what’s left of it will see a name change

Lehman Brothers bought these firms because they generated paper, and lots of it. Lehman repackaged and sold that paper to other institutions—like foreign banks—that were flush with cash.

And who wouldn’t want a piece of that big, fat, juicy U.S. real estate bubble? What could possibly go wrong…

As long as interest rates were low and there were buyers for the debt products that Lehman was peddling, the band played on. But as interests rates rose and terms like f@cked buyer and liar loan entered the discussion of the real estate bubble, one by one, Lehman closed down its paper mills and fired employees.

As we know, of course, the music stopped playing and Lehman got caught without a chair.

The fact that they have been forced to take several billion dollars worth of that dog shit paper onto their own books—as the supply of greater fools willing to buy it from them evaporated—seems like a semi-happy ending to this diabolical tale.

Not so fast.

The problem is that the $10.3 billion in paper that Lehman was forced eat represents just the tail end of the thing as the music stopped playing and their racket collapsed.

They have been generating and selling that stuff for years. Where did it wind up, and when is it going to blow?

I think that when might be easier to know than where:



Higher bars = more foreclosures = more liquidity problems months later

We are definitely not out of the woods with the subprime debacle. In fact, we are in for a year of steady increases in foreclosures and liquidity problems. There are no buyers for these securities now. If banks are holding these bombs, they’re stuck with them and the clock is ticking.

As those teaser rate loans reset, and f*cked buyers go bankrupt in increasing numbers (see chart above), banks are going to have serious problems.

Which banks will be affected?

I don’t know.

Oh yeah, Lehman has decided to stop hiding behind the names of the mom and pop shops it acquired to run this game. From here on out, it’s going to be Lehman Mortgage Capital.

Man, if that’s not a name you can trust, I don’t know what is.

Via: Wall Street Journal:

Lehman, a big player in the bond market hit hard by the recent trouble in the “subprime” business of issuing risky mortgages that has shaken the broader stock market, set the tone in terms of markdowns, taking a $700 million loss on assets that have fallen in value in recent months. At the same time, Chief Financial Officer Christopher O’Meara said “the worst of the credit correction is behind us.”

The $700 million in markdowns were cushioned, Mr. O’Meara said, by a combination of short, or bearish, positions on certain securities and a variety of hedges Lehman used to protect itself. More broadly, he added, the firm’s diverse business mix shielded it from more significant losses during the quarter.

Still, Mr. O’Meara said the difficulty of selling loan commitments to third parties and the lack of buyers for securitized mortgages caused Lehman to take $10.3 billion in assets onto its balance sheet, a move it wouldn’t likely have make under calmer market conditions.

Of that total, $4 billion is deal financing, and most of the remaining $6.3 billion is newly originated home loans that haven’t been sold off as part of securitized products, he said. Bringing such loans and securities onto its books could subject Lehman to losses if markets continue to erode. The move also ties up a portion of the firm’s balance sheet it might have wanted to deploy elsewhere.

One data point investors focused on yesterday was the percentage markdown Lehman appeared to be taking on its leveraged loan commitments as it tried to sell off deal financing to third parties at depressed prices.

Research Credit for ARM Reset Crart: Idleworm, Calculated Risk

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