Lehman Puts New Value on Subprime

A quick entry on the breaking Lehman news:

• LEHMAN CFO SAYS ITS ALT-A MORTGAGE ASSETS MARKED DOWN TO $0.39 PER $1 PAR
• LEHMAN CFO SAYS SUBPRIME MORTGAGE ASSETS MARKED DOWN TO $0.34 PER $1 PAR VS $0.55 IN Q2
• LEHMAN CFO SAYS ASSET BACKED CDOS MARKED DOWN TO $0.29 PER $1 PAR VS $0.35 IN Q2

What this means is that Lehman (LEH) has put a new, lower value on the assets everyone is worried about on its books.  Notice the drop in value in just one quarter.   Subprime assets went from being marked at 55-cents in 2Q to 34-cents in 3Q.    That’s a 39% reduction in book value for subprime in just three months.

The takeaway: if stock and bond investors feel that this is a fair value, we may see some stability in the shares.  If Wall Street believes that this 39% reduction in subprime assets is still not enough, it will likely continue to punish the stock.

Remember that last year, hedge-fund giant Citadel bought E*Trade’s collateralized debt obligation (CDO) portfolio for 27 cents on the dollar.  While we don’t know the exact mix of what kinds of CDOs Citadel purchased, it's interesting that there is still a difference in price (27-cents on dollar for E*Trade’s asset and Lehman valuing its CDOs at 29-cents).    Either Citadel got a HELL of a deal, or Lehman still has to mark these down more.   The market will determine which it is, and we will ask structured finance expert Janet Tavakoli that very question on the 10 a.m. show today.