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Lehman's books get scrubbed

SATURDAY MORNING

By William Cohan
Last Updated: December 15, 2008: 6:59 AM ET

With Bank of America out of the mix, the bankers at the New York Fed examined a proposal by Barclays, whereby the British bank would acquire all of Lehman except for the firm's commercial real-estate asset book, which had a face value of $40 billion (before writedowns).

The assembled bankers spent much of Saturday poring over Lehman's commercial real-estate portfolio in hopes of finding a way to finance the $40 billion of assets that Barclays did not want to acquire. The dodgy assets left behind needed a layer of equity underneath them for the remaining entity to have any hope of viability. According to a participant in the weekend's fevered meetings, Lehman had 2,400 real estate "positions."

Lehman CEO Richard Fuld and Lowitt had announced on the previous Wednesday that the commercial real-estate assets would be marked down to $33 billion - from $40 billion. But, on Saturday, as mortgage-securities experts from Citigroup, Credit Suisse, Deutsche Bank and Goldman Sachs analyzed the portfolio, they quickly realized, according to one participant, "the effective marks on the assets should probably have been $12 billion lower," or $21 billion, rather than $40 billion, almost a 50% discount to their marked value (notwithstanding the Wednesday revision). "There wasn't a disagreement among the group about what the write-down should be," he said.

But there was some disagreement about the $21 billion valuation depending on whether some institutions would have to mark them to market. As a compromise, the four banks instead recommended to the other banks in the consortium that Lehman's real-estate portfolio be valued at around $25 billion. The hole the consortium of banks had to fill was closer to $15 billion, meaning that each one would need to provide around $1 billion to finance the commercial real-estate assets left behind by Barclays in what would remain of Lehman Brothers.

The banks also knew that they would have to take a write-down on their loans as the assets were sold into the market over time. But to facilitate the Barclays deal they were willing to do it. "There was a real concern that the demise of Lehman would lead to real problems for everybody else," one banker said.

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