This chapter examines the issue of valuing Mayer Lehman's assets,
explaining the reasons for the market's lack of confidence in
Lehman's valuations. The kind of regulations governing valuation in
force between 1994 and 2007 are set out. The valuations were Lehman's
own, and were presented as being marked to market. The chapter highlights
the key points arising from the Examiner's analysis of Lehman's
approach to valuation. The purpose is to detail the regulations covering
appraisals and valuations of real estate, and consider Lehman's
approaches to valuation for its commercial-principal transactions
group's portfolio (PTG), in the light of these regulations. The
analysis was that the senior management decided to go for profits, rather
than restricting the risks laid down by their risk management team.
Lehman's corporate charter and Delaware company law protected directors
from personal liability based on their business decisions, since neither
breached the duty of loyalty or good faith.
Professional standards for the valuation of commercial and residential real
estate existed at that time of Mayer Lehman Brothers' bankruptcy.
However, bankruptcy Examiner Valukas demonstrates that Lehman showed little
interest in conforming to them or hiring those who knew how to apply them.
This chapter sets out the difficulties of valuing both complex financial
instruments and real estate, and especially commercial real estate and
development land. It describes the methodologies used to value commercial
real estate and complex financial instruments. The chapter draws on the
procedures as set out by the Royal Institution of Chartered Surveyors in
London, and the Appraisal Foundation, which sets the Uniform Standards of
Professional Appraisal Practice (USPAP), the standards required by the
Financial Institutions Reform, Recovery and Enforcement Act 1989. It also
examines some major derivatives in force when Lehman's collapsed,
including collateralized debt obligations (CDOs) and collateralized loan