Professor Elam

Readers will redcall that Erin Callahan was ousted as the Lehman CFO when she failed to 'rally investor confidence in their financials.'  Apparently she should have spent more time studying cheerleading in college and less in finance. But I digress…

Now Lehman CEO Fuld faces a rebellion. LEH is down 80% this year. We are reading Warren Buffet's 2007 letter to shareholders in Inermed II and Statement Analysis. What are the two precepts that Warren uses to evaluate how well one of his companies are doing?  YOu will recall that  they are

return on invested capital

how much wider is the moat around the company, is this company doing something unique that other companies cannot easily duplicate.

Okay how well did LEH do in this regard, the answer is that it was or is a disaster.

They operated on a razor thing capital of only 3%.  They borrowed short term in the commercial paper market to invest long term in mortgages. When a few mortgages failed to pay, their 3%n capital was wiped out. So there was no return on invested capital.

LEH did not construct a moat at all, they simply mimiced what CITI, MER and others were doing. Once the ship of sub prime started to sink, everyone wanted to sell those 'assets' at once, of course there were no buters, at least not at market prices. MER, see previous post, sold $30 B at 22 cents on the dollar, whoops. One has to look at a different industry, say insurance to find firms that did not succumb to this folly. One is not hearing such disaster stories about Travelers or New York Life for example.