15 September 2008

PIMCO, Vanguard and Japanese Banks Face Billions in Losses on Lehman Bonds

Many firms are holding hurried meetings today over these losses, to assess the impacts with respoect to money market funds, mutual funds, and pension plans. Legg Mason, Fidelity, Axa SA, Franklin Advisers, Vanguard and Pimco are among the largest stakholders.

This is minor compared to what some other failures might look like such as Goldman, Morgan Stanley, AIG, or a major bank like Washington Mutual and Wachovia.

The thing about commercial banks is that there is a well established mechanism for sweeping them into the money bin as long as the dollar and Treasury bonds hold up. Not so for insurance companies and investment banks, which are messy.

Interesting as well that it was Lehman and Bear that took it in the necks, as they were the two big bond houses.

If it is true that they are allowing banks to use depositor's funds to recapitalize their investment activities, then we have come full circle back to 1929 and all that implies.

Pimco, Vanguard Are Biggest Lehman Bond Fund Losers
By John Glover
Bloomberg News

Sept. 15 (Bloomberg) -- Pimco Advisors LP, Vanguard Group Inc. and Franklin Advisers Inc. are among investment companies that may face losses of at least $86 billion stemming from the collapse of Lehman Brothers Holdings Inc., the biggest bankruptcy in history.

Mutual fund companies' filings show they hold more than $143 billion of bonds, led by Newport Beach, California-based Pacific Investment Management Co., manager of the world's biggest bond fund, and Valley Forge, Pennsylvania-based Vanguard, according to data compiled by Bloomberg as of June 30.

``The losses look set to be widespread, hurting the public through their mutual and pension funds,'' said Ciaran O'Hagan, a credit strategist at Societe Generale SA in Paris. ``It's clearly a disaster for public confidence.''

While bond investors will recover different amounts based on their ranking in Lehman's capital structure, models of credit-default swaps assume lenders will recoup 40 percent of their loans overall in a bankruptcy. Investors may receive less than that, based on prices for Lehman's senior bonds of as little as 35 cents on the dollar from price provider Trace.

Pimco holds Lehman bonds in at least 12 of its funds, including the $134 billion Total Return Fund. Bill Gross, manager of the fund and co-chief investment officer of Pimco, was buying Lehman bonds as recently as June, Bloomberg data show. ...

Vanguard holds Lehman bonds among the $450 billion of fixed income it manages, spokesman John Woerth said. An outside spokeswoman for Pimco in London, who asked not to be named, said the company had no immediate comment, Lisa Gallegos, a spokeswoman for Franklin in San Mateo, California, wasn't immediately available.

New York-based Lehman, which filed for protection from creditors today, owes its 10 largest unsecured creditors more than $157 billion, according to the Chapter 11 filing in U.S. Bankruptcy Court in New York. The largest single creditor is Aozora Bank Ltd. in Tokyo, with $463 million in a bank loan. Other top creditors include Mizuho Corporate Bank Ltd., owed $382 million, and a Citigroup Inc. unit based in Hong Kong, owed an estimated $275 million, according to the filing.
Lehman listed total debts of $613 billion and $639 billion of assets in the filing.

Axa SA, Europe's second-biggest insurer, and unnamed affiliates, own 7.25 percent of Lehman's equity, according to the filing. Clearbridge Advisers LLC, the asset manager that Baltimore-based Legg Mason Inc. acquired from Citigroup Inc. in 2005, held 6.33 percent, according to the filing. Boston-based FMR LLC, the parent of Fidelity, the world's largest mutual fund company, held 5.9 percent, the filing said.

Wall Street Journal
Several Japanese Banks Are Top Lenders to Lehman
September 15, 2008 11:29 a.m.

TOKYO -- Several Japanese banks -- flush with cash and relatively unscathed by the global credit crisis -- are among the top bank lenders to Lehman Brothers Holding Inc., which filed for bankruptcy protection on Monday with $613 billion in debt.

Aozora Bank, a mid-sized Tokyo bank, was No.1 on the list of largest bank lenders with a loan of $463 million, followed by Mizuho Corporate Bank, with a $289 million loan, according to court documents submitted with Lehman's Chapter 11 bankruptcy filing. Mizuho Corporate Bank is the wholesale banking unit of Mizuho Financial Group, Japan's third-largest bank by market value. Other big Japanese lenders to Lehman included Shinsei Bank, another mid-sized Tokyo bank, and Mitsubishi UFJ Financial Group, Japan's largest bank.

For big Japanese banks like Mitsubishi UFJ and Mizuho, which have huge balance sheets, the loan losses related to Lehman may appear modest.

But smaller banks like Aozora and Shinsei may have a tougher time absorbing the losses. The two banks have been turned around by private-equity investors after collapsing during Japan's bad-loan crisis. But their performance has been weak in recent quarters. Faced with powerful competition from Japan's giant banks, they have forayed deeper into riskier business areas.

On Friday, Aozora said it expects to swing to a net loss of four billion yen in the fiscal first half ending Sept. 30, compared with a previous forecast of a 15.5 billion yen profit, as it changed the timing of write-downs related to its investment in GMAC LLC, the unprofitable finance arm of General Motors Corp. Aozora invested in this business alongside Cerberus Capital Management, its largest investor.

The long list of Japanese names on the list of bank lenders underlines how these banks are playing an increasingly important role as providers of capital in the global financial market battered by a credit crunch. Unlike many of their U.S. and European peers that have been forced to scale back lending because of big losses related to risky mortgage securities, Japan's top banks like Mitsubishi UFJ and Sumitomo Mitsui Financial Group still enjoy healthy balance sheets and have been vying to expand their presence overseas recently. These banks have stayed shy of investing in risky securities, in part due to a lesson learned from their own bad-loan crisis during the 1990s and early 2000s.

The filing doesn't necessarily mean the loans extended by these banks would go sour. Lehman said it had $639 billion in assets, which will be liquidated and eventually distributed among creditors during the process of liquidation. Aside from billions of dollars in loans borrowed from banks, the Wall Street firm owes over $150 billion to bond holders, who tend to come behind bank lenders when collecting debts in bankruptcy cases.