Paolo Gorgo

Capital Crossing Preferred Corp: Too Cheap?

It looks like LBB (Lehman Brothers Bank) needs additional help to survive. Lehman Brothers Holding has asked the bankruptcy court authorization to support LBB up to an additional $325 million:

(docket 3074)

By this Motion, LBHI seeks authorization, but not direction,
pursuant to sections 105(a) and 363(b)(1) of the Bankruptcy Code and Bankruptcy Rule
6004, to enter into a master repurchase agreement with the Bank (the “Repurchase
Agreement”) under which LBHI will purchase from the Bank a portfolio of residential
mortgage loans for up to an aggregate amount of $325 million

LBHI expects that the cash that will be made available
to the Bank under the Repurchase Agreement will enable Aurora to satisfy its advance
obligations, a significant portion of which will begin to become due on March 16, 2009.

Less than six months ago, the value of LBHI’s equity interest in
the Bank was reported at approximately $1 billion with total assets of approximately $7.2
billion and total liabilities of approximately $6.2 billion. See September 30, 2008 TFR,
Schedule SC. On that same date, the Bank was considered “well capitalized” with a total
risk based capital ratio of 10.57% in full compliance of its capital regulations.
Notwithstanding the decline of the Bank’s capital levels reflected on the Bank’s
December 31, 2008 TFR, the value of LBHI’s equity interest was still reported at
approximately $467 million.

Due to the recent collapse of the financial markets, LBB lacks the
ability to access the funding sources it would normally rely upon to finance Aurora. If
Aurora is not be able to satisfy its monthly Advance Obligations, which will begin to
peak on or about March 16, 2009, Aurora’s Counterparties may, under certain
circumstances, declare Aurora to be in default under the Mortgage Servicing Agreements.
If that happens, the Counterparties could take precipitous actions that would threaten the
value of Aurora’s business and the Bank’s enterprise as a whole and the Bank’s
Regulators may also take regulatory action out of concern that the Bank may no longer be
able to rely on Aurora’s business.