Forensic Analysis of Lehman Problems

Signs of trouble at Lehman Bros (LEH) were evident as long ago as the summer of 2006, according to Audit Integrity Chairman Jim Kaplan, and could have been detected by the kind of “forensic analysis” his firm employs. “At that time,” he says, “receivables began to accelerate at a rapid pace – the first indication of the mortgage mess that was to follow.”

On February 1, 2007, Lehman announced a repurchase of 100,000,000 shares, which represented one-fifth of all shares outstanding. The stock price was hovering in the low $80’s. Within less than three months, key management began unloading over 60,000,000 shares.

Within one year, Lehman was struggling for its very existence, raising capital at every turn and liquidating assets to meet capital needs. This deterioration continues. Shareholders hold stock that has declined 80% while the top insiders walked away with their winnings.

When three genetic markers – repurchases; insider selling; and weak operating results – show their ugly heads, things can only get worse.

Countrywide Financial Corporation (CFC) followed a similar predictable path starting in October 2006.

In his latest Chairman’s Corner Kaplan says, “forensic analysis is an important tool in detecting crime. Luckily, in the investment arena DNA evidence can be read and acted upon before the murder is committed. Each of these three ‘genes’ – deteriorating operations, insider selling, and repurchases – may be harmless by itself, but in combination, they are deadly. “

Comments

[Alan Young:]

Huh? Data points and conclusion, with no analysis to connect them? That wouldn't rate a C in my high school class.

2008 Aug 19 05:28 PM

[prescient11:]

Where was the heads up before it happened? That would be much appreciated.

2008 Aug 19 06:02 PM

[who:]

which bank will fall next?

2008 Aug 20 02:15 AM

[northnode:]

OK introduction but where's the rest of the article?!

2008 Aug 20 05:29 AM

[itiswhatitis:]

Gotta' love the Monday morning quarterbacking in these articles. The deep forensic due diligence would have seen it, huh ? How come no one (that counted) was screaming when Mozillo was dumping (yes...panic dumping on a daily basis) his countrywide stock? No "deep dive forensics" were needed for that...but everyone was too &@^#! scared to say anything, for fear of losing their job! Now we're all on the Titantic with water up to our knees, and everyone's saying the ship isn't really sinking. It's easy to see....just follow the money!

2008 Aug 20 09:35 AM

[Pj568:]

The buyback amount that actually occured in 07 was slightly less than the previous three years. They were just clueless which doesn't bode well for their continued existence.

2008 Aug 21 09:18 AM

[Research Recap:]

northnode: click on the Chairman's Corner link to see full article.

2008 Aug 28 03:29 PM

[Kunle:]

Repurchasing shares, insider offloading and increase receivables... huh! huh! huh!... the Amazon of Nigeria's SEC beware o....

2008 Sep 13 10:05 PM