Lehman Profits From Earlier Write-Downs

Dec.14.07 | About: Lehman Brothers (LEH)

There's an art to the write-down. On the one hand, you don't want to scare people by writing down too much money unnecessarily. But on the other hand, you want to be conservative, and you certainly don't want to have to take any subsequent write-downs because the first tranche wasn't aggressive enough. (Just ask Chuck Prince.) So I was heartened to see today that Lehman Brothers (LEH) seems to be getting it right: its fourth-quarter profits included "$320 million of gains from the sale of leveraged loans that were previously written down".

That's the way it should be done: take a big-but-not-too-big writedown, and then turn a profit during the following quarter when you sell those assets for more than you wrote them down to. Let's hope other banks will prove able to pull off the same trick.