Greenlight sees more Lehman write-downs

By Joseph A. Giannone

NEW YORK (Reuters) - Lehman Brothers Holdings Corp LEH.N, largely unscathed by the mortgage meltdown this year, faces losses well beyond what the market is expecting, activist hedge fund manager David Einhorn said on Monday.

Einhorn, president of $5.5 billion Greenlight Capital Inc, noted Lehman has not recorded significant mortgage losses this year despite its standing as one of the biggest underwriters and traders of mortgages. He spoke at the Reuters Investment Outlook 2008 Summit in New York.

But the New York money manager is shorting Lehman's stock, which means he will profit if the shares decline. Einhorn argues that because of the kinds of assets on Lehman's balance sheet, the No. 4 U.S. investment bank ought to have more write-downs when reporting fourth-quarter results this week.

"My view of Lehman has been that they've sort of suggested that they don't have problems," Einhorn said. "But when you look at their balance sheet, their mortgage assets, not just counting Level 3, are over $80 billion against only a $17 billion intangible capital base. That's before their other exposures, suggesting that there may be problems there," he said.

Lehman has defied the naysayers this year, recording modest losses on mortgage securities even as others on Wall Street suffer more than $60 billion of losses on hard-hit mortgage bonds and structured debt vehicles such as collateralized debt obligations.

But Einhorn is skeptical. He said Lehman at the end of its fiscal third quarter reported more than $22 billion of Level 3 mortgage assets -- the most illiquid, rarely traded assets -- which are valued by banks based on their best estimate.

Of that figure, more than $9 billion were assets that were reclassified as Level 3 during the quarter that ended in August. These were assets that used to have values set by bids and offers in the marketplace, but no longer have reliable benchmark.

Lehman reported $600 million of write-downs on its $22 billion in Level 3 mortgage assets, or about 3 percent, in the third quarter. Einhorn says that raises questions whether Lehman was conservative enough.

"The other banks have taken much larger charges," Einhorn said.

Swiss bank UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) on Monday announced it expected an additional $11 billion in asset write-downs, enough to wipe out profit in the fourth quarter and possibly for all of 2007. Citigroup (C.N: Quote, Profile, Research, Stock Buzz), Merrill Lynch MER.N and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) also have recorded large write-downs in mortgages, structured finance and leveraged lending businesses.

Meanwhile a company like Thornburg Mortgage Inc TMA.N, a home lender slammed earlier this year by liquidity concerns, sold a portfolio of prime, AAA-rated jumbo mortgages at a steeper discount, he said.

"It's really hard to understand how Lehman was able to value its assets at such a modest discount," Einhorn said.

Lehman officials were not immediately available to comment.

Shares of Lehman are down one third from their record high in February and down 16 percent for the past year. Yet Einhorn, who is bearish on any financial company exposed to the weaker credit environment, said it is too early to see any value in the stock because of the question marks over potential losses.

"It's hard to say. There's a lot of questions in that kind of disclosure. Lehman is not a transparent company and they refuse to answer questions on this topic in a way that helps investors actually understand what's going on," he said.  Continued...