NEW YORK (Reuters) - The troubled mortgage and credit markets — and the accounting difficulties they produce — proved too much for Lehman Brothers’ former chief financial officer Erin Callan, another ex-Lehman CFO told Reuters on Thursday.
Callan, who was demoted to the investment banking division at Lehman on Thursday, has deep knowledge about tax law and investment banking. Under normal circumstances she would have been a great CFO for Lehman, said Brad Hintz, former Lehman CFO and now an analyst at Sanford C. Bernstein.
But Callan is not seen in the market as an expert on accounting.
“The issue is simple: she jumped into a crisis,” Hintz said. “That’s tough,” said Hintz, one of the most influential Wall Street analysts.
Lehman Brothers has been wrestling with tanking mortgage markets and weakening credit markets, which have cut into the value of some of its assets and made others extraordinarily difficult to value. Callan became CFO of Lehman in September, when the credit crunch was in full flush.
Over the last several quarters, Callan made misstatements regarding Lehman’s finances that came back to haunt her and shook investor confidence in the company.
For example, on Lehman’s first quarter conference call with investors, Callan said the company had about $38.7 billion of hard-to-value assets known as “level 3” assets. When the company filed its quarterly results with regulators, it revised that figure upward to $40.2 billion.
David Einhorn, a hedge fund manager who sold Lehman’s shares short, pointed to that $1.5 billion discrepancy in a recent presentation in which he raise multiple questions about the company’s accounting. Short sellers profit when a company’s shares fall.
Callan would have ideally made it clear that the level 3 asset values she was giving on the conference call were estimates and subject to revision, Hintz said.
“She made misstatements, and appears to have been given her marching orders,” Hintz said.
On Monday, the company said it expects a $2.8 billion quarterly loss and still had billions of dollars of mortgage and real estate assets. Lehman shares have fallen more than 25 percent since last Friday.
Ian Lowitt, the new chief financial officer, is former global treasurer at Lehman, in addition to being co-chief administrative officer.
“He will be familiar with the balance sheet issues and can handle any counterparty concerns,” Hintz said.
Editing by Derek Caney