Lehman: The Razor’s Edge

This was originally published @Going Concern on September 16, 2009.

When competing hypotheses are equal in other respects, the principle inherent in Occam’s Razor recommends selection of the hypothesis that introduces the fewest assumptions and postulates the fewest entities while still sufficiently answering the question.

Should the government have bailed Lehman out?

What regulatory reforms can prevent another “financial crisis”?

What really happened?

Brad Hintz, a CFO of Lehman in the late ’90s told Reuters, “It was a series of small steps — rising leverage, retention of risky positions, delay of raising capital and reliance on ‘hot money’ for financing…”

All those things contributed to the untenable position Lehman found itself in by the end of the summer of 2008. But the thousands of column inches devoted to trenchant, complex analysis from financial media pundits is a bit more mental masturbation than we need.

On May 21, 2008, David Einhorn told a New York crowd that he was short Lehman Brothers stock because he remained skeptical about their accounting.

On June 4th, 2008, the NYT tells us that Lehman’s CFO,”…Ms. Callan, 42, spent an hour on the phone with Mr. Einhorn answering questions before his speech. Afterwards, she found herself rebutting some of his assertions to investors.”

I think the problem was obvious:

“Unlike Lehman’s two previous CFOs, Ms. Callan isn’t an accountant and had never worked in the finance department…She receives a slimmer daily financial summary than her predecessors, relying more on data from the trading-floor contacts built during her 13-year Lehman career. ‘We have a lot of great finance people here,’ she says.”

Ms. Callan imploded on June 12th.

Lehman’s subsequent CFO was a McKinsey consultant. I bet the May 12, 2008 hour-long conversation between Einhorn and Callan went something like this:

Einhorn: Erin, I’m concerned about the low level of reserves you’ve made for the non-investment grade CDOs.
Callan: Oh, David. Finance told me we’re cool. The auditors have given their blessing. You need to get out more. There’s a trunk show at Prada. Want to go?
Einhorn: But Erin, Lehman should be more transparent on earnings calls. Why did the 10Q disclose higher Level 3 assets?
Callan: Whatever. I just read the IR script. Just a sec, my personal shopper is at the door
and the maid is making espresso… … …Ok, I’m back. Tell me again about Level 3 assets. No value? But we’re Lehman!
Einhorn: Erin, I don’t think you get it. Crap is piling up. You’re going to open the door and instead of Felipe with a delivery from Jimmy Choo it’s going to be a shitstorm.
Callan: David. I am not amused. Louboutins, dear. Choo’s? Really. So street. And not in the fun way.
Einhorn: Erin, what is EY telling you? Aren’t they waving FAS 157 red flags? How can they sign off on these financial statements?
Callan: Are you kidding me, David? I’ve never even met the EY dweebs. They wear “off the rack”. What if someone took a photo of us? Icky. The bookkeepers talk to them. Is FAS 157 that new private club in SoHo? Take me. But you have to promise dress up a bit.

Einhorn is now shorting Moody’s.

Maybe you should listen to him this time.