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Markdown Sparked Lehman Meltdown; More to Come

Other firms could follow suit, meaning widespread losses

By Matt Cantor,  Newser Staff

Posted Sep 15, 2008 9:38 AM CDT
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(Newser) – What caused two venerable investment banks to implode this weekend, and how much more damage can we expect? It started when Lehman Bros. surprised markets by slashing the valuation of its mortgage holdings last week, making downward revisions so steep that "even longtime bears on the stock thought the firm was finally marking its residential portfolio to realistic levels," the Wall Street Journal writes. This prompted investors’ fears that other firms would follow suit, driving losses all around.

Lehman's lower valuations—one category of mortgages was marked at 39% of face value, down from 63% at the end of the second quarter—pose a particular risk to AIG and Citigroup. If they imitate Lehman’s move, it could mean $15 billion in writedowns for AIG and $7 billion for Citi. But there may be a "silver lining" to all this: Big markdowns, the writers note, could “set the sort of prices that finally lure more buyers to distressed mortgages.”

A Lehman Brothers employee looks out a window of the financial institution's world headquarters Monday, Sept. 15, 2008 in New York.
A Lehman Brothers employee looks out a window of the financial institution's world headquarters Monday, Sept. 15, 2008 in New York.   (AP Photo/Mark Lennihan)
A man looks out the window at the Lehman Brothers headquarters in New York, Monday, Sept. 15, 2008. When Wall Street woke up Monday morning, two more of its storied firms had fallen.
A man looks out the window at the Lehman Brothers headquarters in New York, Monday, Sept. 15, 2008. When Wall Street woke up Monday morning, two more of its storied firms had fallen.   (AP Photo/Mary Altaffer)
A trader watches a screen showing Lehman Brothers stock evolution, in a financial office in Paris, Monday Sept. 15, 2008.
A trader watches a screen showing Lehman Brothers stock evolution, in a financial office in Paris, Monday Sept. 15, 2008.   (AP Photo/Michel Euler)
A managing director who worked at Lehman Brothers for 10 years leaves the company's headquarters on 7th Ave. in New York City Sunday, Sept. 14, 2008.
A managing director who worked at Lehman Brothers for 10 years leaves the company's headquarters on 7th Ave. in New York City Sunday, Sept. 14, 2008.   (AP Photo/David Karp)
Lehman Brothers world headquarters is shown Monday, Sept. 15, 2008 in New York. Lehman filed a Chapter 11 bankruptcy petition after attempts to rescue the 158-year-old firm failed.
Lehman Brothers world headquarters is shown Monday, Sept. 15, 2008 in New York. Lehman filed a Chapter 11 bankruptcy petition after attempts to rescue the 158-year-old firm failed.   (AP Photo/Mark Lennihan)
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