Lehman Bad Bank idea a bad one?

September 12, 2008 | By Jim Kim

Lehman's announcement that it would spin off a bad bank was widely expected, and to many it seemed like a reasonable move. But not so fast. The issue of how the bad bank will be financed long-term has come up, of course. Breakingviews says until Lehman can spin off the bad bank, it assumes liability for the first losses, suggesting that there are lots of junior subordinated debt in its portfolio. That stands in contrast to deals by Merrill Lynch and UBS to offload toxic bonds to Lone Star and BlackRock. In those cases, the buyers assumed the first loss risks, which explains the rock bottom prices. Recall the 22 cents on the dollar Lone Star paid. Lehman has written off only 85 percent of the value of these bonds. There's more to come.

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