What caused two venerable investment banks to implode this weekend, and how much more damage can we expect? It started when Lehman Bros. surprised markets by slashing the valuation of its mortgage holdings last week, making downward revisions so steep that "even longtime bears on the stock thought the firm was finally marking its residential portfolio to realistic levels," the Wall Street Journal writes. This prompted investors’ fears that other firms would follow suit, driving losses all around.
Lehman's lower valuations—one category of mortgages was marked at 39% of face value, down from 63% at the end of the second quarter—pose a particular risk to AIG and Citigroup. If they imitate Lehman’s move, it could mean $15 billion in writedowns for AIG and $7 billion for Citi. But there may be a "silver lining" to all this: Big markdowns, the writers note, could “set the sort of prices that finally lure more buyers to distressed mortgages.”
(More Lehman Brothers stories.)
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