Saturday, July 10, 2010

Let's Play "Name that Investment Bank"!

I'm going to post a few pages of an internal presentation at a major investment bank (from November 2007) and you try to guess the identity of the bank. (I've whited-out all the identifying portions.)

Very savvy! Clearly, this bank was no fool — they saw the problems in subprime coming, understood the implications for CDOs, and positioned themselves accordingly.

Think you know who it is? I'll put the answer (and the full presentation) under the fold.


You guessed Goldman, right? Wrong! It was.....Lehman Brothers. I kid you not. Full presentation below. Maybe now people will stop focusing on Goldman's decision to get short the housing market as The Reason that Goldman survived and performed so well. Probably not though.

Lehman - ABS CDO Exposure (Nov. 1, 2007)

14 comments:

Kid Dynamite said...

i just finished reading both The End of Wall Street (mostly about LEH) and House of Cards (about BSC)... the BSAM hedge funds that blew up (Cioffi and Tannin's funds) are similar to the topic of this post - they said they were positioned for the downturn, they said they expected it and had a tiny subprime position... there was only one problem - either they were outright lying, or they were outright wrong in the execution of their hedges. the BSAM hedge funds had more than 60% of their assets in subprime - in the form of ABS (CDOs) - although they repeatedly claimed that the number was below 15%, and usually closer to 6% (probably because they were only counting plain vanilla subprime MBS?). then, they tried the same trade Morgan Stanley did - Alt A vs Subprime... that didn't work either.

the biggest end problem for BSC and LEH was the way they pledged their crappy assets as collateral in overnight funding markets - which turned out to be worthless to borrow against - that's what sunk them.

the cash flows are important too - i mean, if you're levered long subprime CDOs, even if you're "hedged" on the net exposure, the problem is that when the value of your long position plummets, or lenders no longer accept them as collateral - you are dead in the water - even if in THEORY you make it up on a short position, or a CDS hedge - you may not have mark to market losses, but you don't necessarily get the cashflow from the hedge in the same timeframe.... result: implosion. i don't think that LEH was even close to hedged at any point.

MR said...

I don't think the presentation is that disingenuous. Lehman's problems were not in subprime CDOs simply because it wasn't a big enough player in the space. Its problem was all the CRE, outright MBS and outright real estate/financing to real estate ventures that it held on its balance sheet. The examiner's report is pretty good on all this http://lehmanreport.jenner.com/VOLUME%202.pdf .

JCH said...

Well, other than AIG, what companies did have a CDO problem?

Anonymous said...

@JCH: As you might guess from the competitor analysis slide, MER did. C too, and (thanks in part to a hedged position that wasn't) UBS. MR is entirely correct about the main sources of LEH's problems

Anonymous said...

Maybe now people will stop focusing on Goldman's decision to get short the housing market as The Reason that Goldman survived

Many people concentrate more on the $12.9 billion that GS got from the AIG rescue as a possible contributory reason.

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