US investment banking giant Lehman Brothers yesterday disclosed that its
exposure to sub-prime debt pools had hit revenues by $700m (£350m).
The bank reported that revenues in its fixed-income business had plummeted by
47% to $1.1bn as it was forced slash values of debt instruments and derivatives
and take the writedown.
‘Within Fixed Income Capital Markets, the firm recorded very substantial
valuation reductions, most significantly on leveraged loan commitments and
residential mortgage-related positions,’ Lehman said as it reported third
quarter results for 2007.
The large scale write down is likely to calm fears that banks would airbrush
their exposure to sub-prime debt. As markets for these instruments have frozen,
banks can no longer reach valuations by ‘marking-to-market’ and have to use
complex valuation models instead, which are open to subjectivity.
Lehman decision to take the hit from sub-prime exposure may be followed by
Morgan Stanley, which reports today, and Goldman Sachs and Bear Stearns, who
release Q3 numbers tomorrow.
UK markets will be paying close attention to how the US banks book their
exposure to securitised debts into their accounts
‘Valuing these instruments is a subjective process and how the US banks mark
down their portfolios will provide some information on what to expect in
illiquid markets,’ said Richard Barnes, banking analyst at Standard &
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