Professor Elam

But a year ago LEH claims to have made $5.5 B!  My question-do you believe either number?  In the accounting books the entries are easy to understand. Mary puts $15,000 up to start her law practice and then rents an office for $1,000 a month. But accounting for intangible assets is much more difficult. Here is what is happening.

A local bank originates $10 M in mortgages. They package these and sell them to Fannie Mae.  FNM then re sells them to brokerages. The brokerages then take the loan packages apart and insert various sub prime mortgages, taking interest only payments out, leaving principal only payment tranches in.  These are then re sold to other firms. Those firms sell short term paper to finance their purchase of higher yielding long term 'mortgages/ or at least they were mortgages.  Now, I am sure the firms owe aginst the mortgages but what are the mortgages worth? Some subprime borrowers miss their first two payments. Now the holder of those notes cannot make the full re payment on the commercial paper.  That is how the commercial paper market collapsed last January.

I doubt LEH 'made' $5 B a year ago, I am sure LEH has 'lost' $3 B.'  The fact they now need to raise more capital suggests more losses lie ahead.  The stock market dropped 400 points Friday, the reason is uncertainty over such events.

The ex CFO talks with Maria Bartiromo at this link.