At the Thursday October 16th 2008 hearing before the judge overseeing the bankruptcy of Lehman Brothers, the lead bankruptcy lawyer representing Lehman Brothers, Attorney Harvey Miller from Weil Gotschal, indicated that the firm is presently the focus of three grand jury investigations. According to Attorney Miller, the Southern and Eastern Districts of New York as well as the New Jersey U.S. Attorney offices are looking into various undisclosed aspects of Lehman Brothers' collapse.

In conjunction with these investigations, apparently a dozen subpoenas have been issued to a dozen current and former senior executives. New reports have subsequently suggested that CEO Dick Fuld and former-CFO Erin Callan are included on that list. Others have speculated whether former-COO Joe Gregory, the former head of Lehman Mortgage Capital Ted Janulis and Mark Walsh, the former head of the Lehman CMBS real estate business, might or might have received such subpoenas. CNBC reported that Joe Gregory's successor, Bart McDade had not received such a summons from Federal investigators.

Like many other observers of the demise of Lehman Brothers, Toomre Capital Markets LLC ("TCM") wonders who else was on the list of the lucky dozen to receive such Lehman Brothers subpoenas.

On Wednesday September 24th 2008, The TimesOnline website is reporting that FBI Investigates Fannie Mae and Lehman Brothers. Apparently the Federal Bureau of Investigation ("FBI") has launched an inquiry into Fannie Mae and Freddie Mac, the mortgage companies; Lehman Brothers, the bust investment bank; and AIG, the nationalized insurance company.

"It is understood that investigators are trying to ascertain whether fraud helped caused some of the troubles at the four groups. The investigation includes whether executives deliberately misled the stock market about the health of their businesses." At AIG, news reports in the past ten days or so have suggested that the former senior management did not appreciate until just recently the full extent of the problems in their derivatives subsidiary AIG Financial Products. That led to the effective take-over of AIG.

Lehman Brothers apparently failed because market participants had little confidence in where its mortgage assets were marked-to-market. News reports about the meetings at the New York Federal Reserve Bank during the weekend of September 14th suggested that a number of market participants from other investment banks were surprised to see the relatively "rich" (or high) prices to which many of Lehman Brother's mortgage assets were marked. It has been suggested that from CEO Dick Fuld, President Bart McDade, (and former-COO Joe Gregory before him), former-CFO Erin Callan, and others down to the recently-retired global head of the Mortgage Capital division, Ted Janulis, all saw gold in what many others viewed as lumps of coal.

No doubt one or more of these executives will be answering questions for the FBI about possible allegations that there were mis-statements of asset values, particularly in the mortgage area. David Einhorn of the hedge fund Greenlight Capital raised numerous questions about the valuation of mortgage assets at Lehman Brothers after its first-quarter 2008 earnings report. At the time, various Lehman Brothers executives strongly rejected his allegations.

Lehman Brothers is dying and effectively dead. In the next few hours the world will learn whether there is some type of forced rescue or whether this investment bank will be the first major institution that is "too big" and yet allowed to fail. The consequences of that failure are likely to rattle the markets in the United States, Europe and the Far East.

The Wall Street rumor website Dearlbreaker has a posting from early Sunday morning September 14th 2008 entitled We Have Reached A Deal For Lehman, Sources Say. That article starts, "We understand that a deal has been reached to divide Lehman Brothers into two entities, with a "bad bank" taking the toxic, real-estate assets amounting to around $85 billion. The deal will be financed without any government backing. Lehman chief executive Dick Fuld will resign."

Toomre Capital Markets LLC ("TCM") has watched the Lehman Brothers story evolve with some interest over the past year. This $85 billion number is far greater than Lars Toomre ever recalls being talked about before.

If this figure of bad assets is indeed accurate, Dick Fuld, Joe Gregory, Ted Janulis, Dave Sherr and all of the rest of the Lehman Brothers senior management (past and present) truly deserve to be taken out drawn, quartered and then shot. Where did this amount of "bad assets" come from?? My impression from all of the talk of liquidations is that were something on the order of $30 billion in troubled real estate holdings. If there truly was almost three times as much, that fact was not clearly communicated to the market participants. And if it was communicated, let me then repose the question, "Where the heck were Lehman Brothers' enterprise risk management controls that allowed the mortgage department to build such enormous positions???"

On Thursday August 21st 2008, Bloomberg News is reporting that Lehman's Janulis, McKinney Leave as Mortgages Shrink. As the article explains, Ted Janulis most recently headed up Lehman Brother's mortgage capital division where more than 2,500 people have been fired since the credit crunch began. Rich McKinney, who headed securitized products in the Americas since the resignation of his predecessor David Sherr at the end of 2007 to start his own hedge fund (supposedly closely aligned with Lehman Brothers), has also resigned to join another firm. The article indicates what remains of the mortgage capital division will be folded into the fixed-income division.

Ted joined Lehman Brothers in 1985 and came to work on my CMO and ABS Trading Desk. I well remember Ted working with Kevin McDermott and I as we were almost overwhelmed by the sharp decline in interest rates during 1986. After that, for a while Ted traded CMOs with short-average lives before gravitating to the sales and marketing of the CMO and REMIC residual classes. In those days, the sale of the highly illiquid residual class was the key to completing a new issue arbitrage transaction. With Lehman Brothers' introduction of floating-rate CMO bond classes, Ted took on the challenge of selling what came to be known as humped-backed residuals that were highly sensitive to both LIBOR and mortgage prepayment rates.