Lehman Bank, Chpt. 2

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Lehman Brothers Bank, the small savings and loan operated by the bankrupt investment firm, is still open for business. But bank regulators have put some shackles around the tiny institution.

Last week, we told you how Delaware-based Lehman Bank had filed the biggest claim to date in the investment bank’s mammoth bankruptcy. And we noted that Lehman Bank—in a bit of a surprise—was still hawking credit cards on its website.

Well it turns out that on Jan. 26, the Office of Thrift Supervision took formal action to limit some of the bank’s operations. While Lehman Bank remains a going concern, the OTS issued a cease and desist notice, ordering the bank not to “enter into any new commitments to make commercial loans.” Regulators took action after determining Lehman Bank would “deplete its available liquid assets,” if it honored all of its commercial loan obligations.

In its hey day, Lehman Bank, which also offers checking accounts and CDs, was an important cog in the investment bank’s mortgage and securitization business. The bank formally came into existence in 1999, when the investment firm acquired Delaware Savings Bank, a troubled thrift, and injected it with fresh capital. Hmm, injecting a bank with fresh capital, where have we heard that strategy before.

Anyway, in 2006, Lehman Bank boasted an $18 billion loan portfolio, of which nearly 78% were residential mortgages. The mortgages were essentially warehoused at Lehman Bank until they ready for securitization into mortgage-backed bonds, including collateralized debt obligations. A subsidary of Lehman Bank is Aurora Loan Services, which had originated subprime loans and other less than prime home loans.

Today, Lehman Bank’s loan portfolio is down to $3.7 billion. But just a scant $200 million of those loans have been funded. The remaining $3.5 billion in loans are unfunded, according to filing prepared by the investment bank’s bankruptcy team. It’s a good bet the OTS had some of those $3.5 billion in unfunded loans in mind when it issued the cease and desist order.

But at least, the OTS didn’t say Lehman Bank had to stop issuing those credit cards.

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