Forensic Analysis of Lehman Problems

Includes: CFC, LEH
by: Research Recap

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. “

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