Lehman Brothers Acknowledges Futility of Subprime Lending Arm

Posted by Bess Levin, Aug 22, 2007, 3:41pm

Lehman Brothers announced this afternoon that it is shuttering BNC Mortgage, one of its home lending units and, in the process, laying off 1,200 employees. This translates to roughly 4.2 percent of its total workforce (and: 4.2 percent less people clamoring for a Size M Super Mario Brothers t-shirt with a “LEH” superimposed onto the “Super Mario” at bonus time). The bank noted that current market conditions, wherein no one in their right mind is giving out subprime loans, have significantly reduced the demand for “resources and capacity in the subprime space.” Lehman will suffer only a mild hit of $52 million to third-quarter earnings. One Brother based in New York commented, “Big deal, it’s our lending arm and they likely sit in Wisconsin, no? BNC???” Familiarizing himself at this point seems somewhat moot.

Lehman Closes Subprime Unit and Lays Off 1,200 [NYT]

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Posted in: Lehman, Subprime Mortgages

Comments

Posted by BizSpeak man, Aug 22, 2007 3:54PM

"subprime space"!!!

I remember when I came up with "over-arching, co-locational deployed intellectual capital synergistic architecture..."

Man, those were the days.

Posted by realist, Aug 22, 2007 4:00PM

who wants to bet how long before they "re-discover' new opportunities lending to the unwashed masses beyond 10021?

Posted by JD, Aug 22, 2007 4:01PM

Dylan Ratigan is the most annoying human being alive, even more so than Zach.

Posted by wickerpark, Aug 22, 2007 4:26PM

theres something beyond 10021?

Posted by I stopped watching CNBC b/c of Ratigan, oh and the content, Aug 22, 2007 4:34PM

who's Zach?

Posted by anonimouse, Aug 22, 2007 4:40PM

What'd Dylan do this time (anything in particular or just being Dylan?)

Posted by JD, Aug 22, 2007 4:47PM

He needs a mini skirt and pom poms. The cheer leading near the close made me nauseous.

Posted by inIT4the$, Aug 22, 2007 4:49PM

@wickerpark

Yes, now there is 10075. I'm seriously pissed they changed my zip. I have zero cache now!

Posted by Random Banker, Aug 22, 2007 4:51PM

The people in this business (i-banking) are so fucking stupid its unbearable. Ok, now is the time to be investing in sub-prime, everyone is exiting the business meaning the one person remaining gets to dominate the market... this is like when Merrill fired its High Yield team in 2002 or Citi shut down prop trading around the same time... then they come rushing back in as the market was peaking over the last year. How is it possible for people to be this stupid? I predict Lehman will start its next sub-prime unit in 2013 just in time for the next crisis.

Posted by get a clue, Aug 22, 2007 5:34PM

I'm not exactly a Barton Biggs fan; but, he once said that there's usually plenty of time to buy at the bottom -- because a bottom happens when an asset class is untrendy and that perception changes slowly.

I wouldn't buy in to subprime until there's been a little more shaking out. A big bankruptcy or two. Then, when subprime is out of the headlines... then buy.

Posted by pshaw, Aug 22, 2007 5:44PM

if you think right now is the time to invest in subprime then that tells me why you signed 'random banker' instead of 'a trader'

Posted by , Aug 22, 2007 5:47PM

a big bankruptcy or two? Haven't we seen about 50 already? If someone is waiting for BSC or HSBC to go bankrupt, its not going to happen.

Sub-prime is still ghetto (literally and figuratively) but probably not a bad time to stick your toe in the water.

Posted by pshaw, Aug 22, 2007 5:56PM

There have been some bankruptcies. But not enough to cleanse the misdeeds of a lot of deadbeats.

Look at how long LTCM lasted -- and that was one firm which knew all its positions. Subprime problems are much larger, spread out among many more firms, and not transparent -- even if somebody intercedes. How many mom-and-pop S&Ls hold this crap? Add in liquidity problems and it becomes a relay race of bankruptcies.

Go read Kindleberger again. We haven't yet hit a reasonable level of bank failures and public disgust.

Posted by Random Banker, Aug 22, 2007 6:27PM

Yeah I don't mean you have to buy today. Just that we're getting closer to a buying opportunity, rather than farther away.... I guess the whole "cut your losses" mentality at i-banks comes from the the trading side of the business.

Is Biggs still short oil?... good luck with all that.....

Posted by Turkey Hunter, Aug 22, 2007 6:29PM

This is not the end... not even the beginning of the end etc... Random Banker and Anon 5:47 better have some part time jobs to fall back on if they get into subprime now...

The shit hasn't even hit the fan with the majority of 06-1 resets. That's when the howling will really begin.

Posted by jope, Aug 22, 2007 7:35PM

i think the time to buy subprime is when everyone starts talking about gold, silver, and uranium ... cause that's when I'm selling to those idiots at the top!

Posted by anon, Aug 22, 2007 8:57PM

@Random Banker: just because spreads are blowing out and (some) subprime loans are tremendously underpriced simply indicates that some INVESTORS might want to start looking at subprime. For LEH, though, it's a totally different story--they make money pushing the paper, not investing in it. And given that nobody's buying RMBS, there's no reason for them to pay people in Wisconsin to underwrite loans that will only sit on their books and earn a shitty carry. Finally, by booking a paltry $52mm loss, they can help provide some pyschological support to their stock, which could use the help right now. Dick Fuld's not dumb. They'll be back in Subprime with plenty of time left in the trough.

Posted by pshaw, Aug 22, 2007 10:06PM

Turkey Hunter is spot on. And he didn't even mention all the balloon loans which have yet to come due. Plus credit cards are getting tougher on customers. Do you think most of those deadbeats tottering on the brink of foreclosure pay off their balance (and on time) every month? No way. Deadbeats are going to get dry-fukt before it'll be time to buy.

As for Biggs shorting oil... That's why I said I'm not a total fan. He's spent his life picking longs, but he has less of a clue about shorts.

Posted by Anal_yst, Aug 22, 2007 10:33PM

So the question remains then, what is the ideal, no the perfect, trade to profit off the current (and expected near-to-intermediate term) scenario?

Short subprime origination/underwriting, long hard assets/treasuries, buy out of the money calls on subprime lenders, short the dollar, long yen?

Lets hear some suggestions!

Posted by Turkey Hunter, Aug 22, 2007 11:46PM

Ideal trade was to short the toxic single name RMBS at par. For the the price of short term negative carry, you get the face value as the these bonds go to zero...

Posted by pshaw, Aug 23, 2007 12:48AM

Pefect trade? In a world with schemers and randomness? pshaw!

The perfect trade is to find an illiquid instrument you hold where the other side is a sick fund. Then, you trade small notional in that market at a price that pushes the fund toward collapse. Collect the mark-to-market and continue next day at worse prices. You pick up the mark-to-market every day -- putting you first in line before the creditors. You could even flip back a lot of your exposure as they go down -- to provide liquidity.

But a nice (i.e. less sleazy) move if you're in a small office: Buy the mortgage for your building at a discount from a pool. A firm I was at did that and ended up owning their building for something like 20 or 30 cents on the dollar.

Otherwise, I'd look at the default spreads between a basket of originators and a basket of their loans. I suppose that's just boring in comparison though.

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