Page 356 - untitled

SEPTEMBER : THE BANKRUPTCY OF LEHMAN 


after, the rumors and the naked short sellers came after us.” The company pressed
the SEC to clamp down on the naked short selling. The SEC’s Division of Risk,

Strategy and Financial Innovation shared with the FCIC a study it did concerning
short selling. As Chairman Mary Schapiro explained to the Commission, “We do not
have information at this time that manipulative short selling was the cause of the col-
lapse of Bear and Lehman or of the difficulties faced by other investment banks dur-
ing the fall of .” The SEC to date has not brought short selling charges related to
the failure of these investment banks. 
On March , Lehman reported better-than-expected earnings of  million
for the first quarter of . Its stock jumped nearly , to .. But investors and
analysts quickly raised questions, especially concerning the reported value of
Lehman’s real estate assets. Portfolio.com called Lehman’s write-downs “suspiciously
minuscule.” In a speech in May, David Einhorn of Greenlight Capital, which was

then shorting Lehman’s stock, noted the bank’s large portfolio of commercial real es-
tate loans and said, “There is good reason to question Lehman’s fair value calcula-
tions. . . . I suspect that greater transparency on these valuations would not inspire
market confidence.” 
Nell Minow, editor and co-founder of the Corporate Library, which researches
and rates firms on corporate governance, raised other reasons that observers might
have been skeptical of management at Lehman. “On Lehman Brothers’ [board], . . .
they had an actress, a theatrical producer, and an admiral, and not one person who

understood financial derivatives.” The Corporate Library gave Lehman a D rating
in June , a grade it downgraded to F in September . On June , Lehman

announced a preliminary . billion loss for its second quarter—the first loss since it
became a public company in . The share price fell to . Three days later
Lehman announced it was replacing Chief Operating Officer Joseph Gregory and
Chief Financial Officer Erin Callan. The stock slumped again, to ..

“THIS IS NOT SOUNDING GOOD AT ALL”
After Lehman reported its final second-quarter results on June , the New York
Fed’s on-site monitor at Lehman, Kirsten Harlow, reported that there had been “no
adverse information on liquidity, novations, terminations or ability to fund either se-

cured or unsecured [funds].” The announced liquidity numbers were better that
quarter, as were the capital numbers.
Nevertheless, Lehman’s lenders and supervisors were worried. The next morning,
William Dudley, then head of the New York Fed’s Markets Group (and its current
president), emailed Bernanke, Geithner, Kohn, and others that the PDCF should be
extended because it “remains critical to the stability” of some of the investment
banks—particularly Lehman. “I think without the PDCF, Lehman might have experi-
enced a full blown liquidity crisis,” he wrote. 
Just one week after the earnings release, Harlow reported that Lehman was in-
deed having funding difficulties. Four financial institutions had “trading issues”
with Lehman and had reduced their exposure to the firm, including Natixis, a