A run on Lehman Brothers might come at any time

In the dawn of the subcrime meltdown, Dick Fuld said

“Do we have some stuff on the books that would be tough to get rid of? Yes,” he said, referring to commercial and residential mortgage assets. “Am I worried about it? No. If you have some repricing of these things will we lose some money? Yes. Is it going to kill us? Of course not.”

Lehman has taken $17 billion in write-downs since last year: not so many as Citi (41 bn) or UBS (38), but on much smaller shoulders. Under Bear Stearns death by ritual sacrifice  pressure, it sold $130 billion of assets during the second quarter, but that doesn’t mean at all it won’t have more write-downs in progress. Wrong, rotten subcrime assets still in their hands are est. another $65 billion. They made 2/3 of the road, but at the end there is a sale.

In June,  a tug-of-war has exploded between David Einhorn (leading short sellers) and the beautiful, celebrated Lehman CFO  Eric Callan. She lost, since she was wrong; or, she was wrong since she lost (in financial herding, you know, prophecies are self-fulling beyond a critical mass; as testified the Bear Stearns boss to the Senate, on April 3). She was right, in her last CFO words:

Ms Callan admitted that the issue of the firm’s long-term business model had been vexing top management.

Yet she added that Lehman had concluded it would be able to boost returns with lower leverage by charging more for other services, particularly in markets where few banks are able to provide credit to companies. (FT, June 9)

In a few weeks or months, LEH will be sold to the best buyer: after a Korean deal did not take off at the moment, believed to be possibly Barclays (not immediately, since the UK group is now raising $4 billion new stock).

Fuld and 14 years of Lehman sharesJune 16 update.

Lehman chief accepts blame for $2.8bn loss

By Ben White in New York

June 14.

Breaking Views intervenes, with its usual independence, on the WSJ.

Up in the Heir at Lehman

In a Crisis of Confidence, Investment Bank Must Have A Plan for Life After Fuld

What is Lehman Brothers Holdings Inc.’s plan for life after Richard Fuld? (…) confidence in the company’s ability to remain an independent concern is shrinking fast. And the demotions Thursday of Lehman’s president and chief financial officer merely highlighted its apparent lack of a succession plan. (…)  Lehman’s share price decline is now worse than those of UBS AG, Wachovia Corp., Merrill and Citigroup Inc. — all of which showed their bosses the door.

June 13

LEH shares up today 13.7%, to $25.8 (it was $37 at end of May).

MORAL HAZARD AT WORK IN BOND & CREDIT MARKETS

Fed unofficially warns, but Fed critics already foresaw this bias

HEARD ON THE STREET, by David Reilly and Peter Eavis
from The Wall Street Journal.

The good news about Lehman Brothers is that it’s no Bear Stearns. The firm won’t disappear overnight. The bad news is that its survival will still be pretty painful for shareholders. (…)

So Lehman may have some breathing room, perhaps even enough to allow Chief Executive Richard Fuld to continue fighting against a sale of the firm. But, with the credit crunch continuing to bite, it is tough to see how Lehman can earn its way out of its current predicament.

dealbreaker.com

Government Officials Worry About Bond Market’s Muted Reaction To Lehman News

Investors bid up Lehman Brothers’ bonds yesterday after news broke that the company was replacing two top executives. The price of protection on Lehman bonds also declined. This reaction–which starkly contrasts to the decline in Lehman’s share price yesterday–has government officials concerned.

Government officials who spoke to DealBreaker on the condition of anonymity said they are worried that the market is convinced the Federal Reserve won’t let a major US securities firm collapse. This is a cause for alarm because it indicates that investors are not taking into account full range of risks faced by investment banks, which could in turn remove an important market check on risky behavior. Although Lehman and its rivals have been pushing down debt levels recently, cheap debt that is unlinked to institutional risk could encourage a new round of re-levering, one official warned.

“What we saw yesterday was moral hazard in action,” the official said.

The price of credit default swaps for Lehman is now half of what it was in March, the Wall Street Journal pointed out this morning. That can be looked at as a dramatic demonstration of the value of having the Federal Reserve’s implicit guarantee of Lehman’s credit worthiness. In recent weeks, officials from the Federal Reserve have publicly remarked on the dangers created by this guarantee. On Wednesday, Treasury department undersecretary Robert Steel went out of his way to stress that the window was not a permanent guarantee for securities firms.

Are Lehman Investors Confident In Fuld Or In A Sale?

When Lehman announced it was firing chief financial officer Erin Callan and president Joseph Gregory yesterday, there was a lot of speculation about whether investors in its recent $6 billion sale of common stock and preferred shares might try to pull out. Couldn’t these top level changes trigger some sort of material adverse change that would let investors back away?

Several big investors have now indicated that they are staying on a Lehman. BlackRock, former American International Group CEO Hank’ Greenberg and New Jersey’s pension fund have all indicated, either publicly or privately, that they are sticking with their investment commitments despite the fact that the share price has fallen well below the levels at which they agreed to buy. Blackrock has gone on record with comments supporting Lehman’s “leadership,” which these days basically means chief executive Dick Fuld.

But are these investors really backing Fuld and his newly announced team?

Our comment: Good question. Neither of the 2. They bet on a sale of LB to a big buyer: JP Morgan again, not likely, rather: 1) Bank of America (alhough Karl Lewis might prefer to eat Merrill Lynch); 2) a big overseas bank like Barclays (rumours)  or HSBC  (the FT suggested 1 month ago): this would be OK for a bank like Lehman, still too reliant on domestic fixed-income revenues, even after wide efforts lead by Fuld to diversify in late years. Becoming the US financial arm of a big European, or Asiatic universal bank.

Betting on a sale backed-up by the Fed, otherwise there would be no buyer, or the price would soon be close to zero: perhaps a little less cheap and dramatic than Bear’s bailout (during the Presidentials, it’ll be a POLITICAL FIGHT). Problems aggravating MORAL HAZARD  into a potential FINANCIAL SCANDAL (that might explode when something will leak out).

SOMEONE in the FED  and\or the US GOVT. is apparently protecting and guaranteeing SUBCRIME VULTURES.

Ask the Lehman new investors:

Cummings illustration

How can they guess  NOT TO LOSE A LOT OF MONEY in the deal?

Who told them the Fed is gonna backing up a Lehman sale?

Would they throw away a few billion USD, without an INSIDER INFO about a Fed bailout?

This is the REAL mistery! Of course: in the LR Lehman didn’t perform differently from rivals, but it is just precipitating now (see the graphic above – June 14 post update – from the WSJ).

 

FT

Man in the News: Dick Fuld

By Ben White

Lehman is a dead bank walking, say its critics who argue the reason it has not yet suffered the same fate as Bear Stearns is the emergency facility that allows it to borrow from the US Federal Reserve. “Lehman is propped up now by the US taxpayer and nothing else,” said one financial services industry chief executive. “When the Fed window goes away, so does Lehman.”

Mr Fuld .. may come under private pressure from regulators, eager to take away the temporary borrowing facility, to get Lehman’s house in order and pursue a sale to a larger institution as soon as he can, either to a big US bank or a foreign buyer. The problem is it goes against every fibre of his being, especially as he would be selling from a point of weakness.

 

June 12

DRAMATIC SHAKE IN LEHMAN GOVERNANCE, TWO  MORE SACRIFICIAL LAMBS AT THE ALTAR: NO WAY.

THE MARKET KEEPS BETTING FOR A BANK RUN, ACQUISITION OR BAIL OUT. IN 10 CRISIS DAYS, SHARES FELL FROM $36 TO 22.70 (today’s closure). 1 year ago the highest value, before subcrime, was $82.05.  Now Lehman’s capitalization is below  $13 billion, a tiny fraction of rivals’. Goldman Sachs Group has a value of about $65.8 billion, Morgan Stanley of $43.4 billion and Merrill Lynch of $36.2 billion.

FORBES

Can Lehman Last?
Liz Moyer06.12.08, 12:30 PM ET

Maybe it just buys time. Foreign banks, particularly Barclays (nyse: BCS– news – people ) in the United Kingdom, have been rumored to be interested in buying a chunk or all of Lehman.

FT

Lehman short-sellers consider ending run

By Aline van Duyn, Michael Mackenzie and Anuj Gangahar in New York

Published: June 12 2008 22:16 | Last updated: June 12 2008 22:16

Investors with short positions in Lehman Brothers shares, who have profited from the sharp decline in the Wall Street companies’ share price, are considering ending the bet that share prices will drop further.

This week’s revelation by Lehman of a $2.8bn quarterly loss gave further clout to the views of short-sellers such as David Einhorn, founder of Greenlight Capital, who has made the case since last July that the assets on Lehman Brothers’ balance sheet are vastly overvalued.

“We, like others in the market, have been following the tug-of-war between David Einhorn and Lehman over the past few weeks,” said Steven Gross, principal at Penso Capital Markets, a hedge fund. “It now looks the shorts have been right and we have seen a capitulation by Lehman this week.” (…) 

“We now know the playbook after March 17, and a forced sale of the bank could occur. If there is a buy-out, credit spreads and volatility could collapse. The risk reward of shorting Lehman is much less clear at this stage,” Mr Gross said.

LEX

The shake-up indicates the level of pressure Mr Fuld is under to restore credibility. However, coming after so many defiant messages against Lehman’s naysayers, it sends a mixed message. On the one hand, heads have rolled, so something is being done. On the other, sudden moves like this raise the question: is there worse news that we do not know?

That uncertainty is Lehman’s central problem. Having raised new money and with the Federal Reserve’s credit facility to hand, a Bear-like meltdown looks unlikely. However, there are still too many unanswered questions regarding the estimated $65bn of troublesome assets still sitting on Lehman’s books, such as the marks taken on various property investments.

WSJ:

Callan, Gregory Out at Lehman

By JED HOROWITZ
June 12, 2008 6:18 p.m.

NEW YORK — Lehman Brothers Holdings Inc., hustling to rebuild confidence about its financial credibility, replaced its president and its chief financial officer Thursday.

Chief Executive Richard Fuld, 62 years old, the longest-serving head of a big investment bank, named 48-year-old Herbert “Bart” McDade to replace longtime colleague Joseph Gregory as president and chief operating officer.

He also removed Chief Financial Officer Erin Callan, 42, who he named to the post just seven months ago, replacing her with Ian Lowitt, a low-profile administrative and finance executive. (..)

In spite of her assertions about its capital strength, Lehman raised $12 billion of new capital between February and the end of May, and this week issued a stunning denouement by saying it is raising $6 billion of new equity and will likely report a second-quarter loss of about $2.8 billion — the first loss since it went public in 1994.

Ms. Callan blamed the loss on hedges that went awry on Lehman’s real-estate portfolios and additional write-downs in the value of its real estate, loan and securities holdings.

Lehman’s shares fell 26.4% from Monday through Wednesday in the wake of the plan to dilute stock holders by about 30%. Thursday’s shakeup appears to have done little to reassure investors. Lehman shares fell as much as 7% after the announcement, and have careered back and forth since, recently trading down 1% to $23.66. (…)

Mr. Fuld, a tenacious executive who has been heralded for his ability to overcome firm-threatening crises and keep a loyal coterie of lieutenants around him for decades, may have made sacrificial lambs of Ms. Callan and Mr. Gregory, some observers said. (…)

Lehman also on Thursday said it has closed its $6 billion new stock offering, which includes $4 billion of common shares that analysts say dilute current shareholders by about 30%, and $2 billion of mandatorily convertible preferred stocks. Insurance executive Maurice Greenberg, the former CEO of American International Group, has publicly said that he invested in the offering because of his confidence in the company’s leadership.

 

June 9

LEHMAN ABOUT TO ANNOUNCE A 08Q2 $2.8b LOSS, AND RAISING $6b TO POSTPONE A RUN

Sources: AP, WSJ.

One week ago the Lehman crisis started, since its expected $0.3 bn loss in 08Q2 were about to come much bigger: they are now est. $2.8 bn! As a consequence of its unsustainble exposure to the subcrime financial meltdown (asset write-downs and hedges used to offset losses in real estate and other securities). Lehman shares are down again at March crisis level: they fell under $30 in premarket trading today ($82 one year ago).

Lehman is actually trying hard to raise $6 bn in ordinary shares (a sum equal to all the fresh capital raised in one year to now, mostly in the last quarter). The WSJ and FT name South K. sources (public Korea development bank, and a commercial bank: likely Kookmink Bank, Korea First Bank or  Woori financial group; plus less strategic capital from Korean Pension Service and Korean Investment Corp, the government-controlled fund that invested in Merrill Lynch), and today the WSJ is referring to:

“the New Jersey Division of Investment, which manages the state’s $80 billion of pension funds and recently invested in Merrill Lynch & Co., and from C.V. Starr, the investment vehicle of Maurice R. “Hank” Greenberg, former chairman and chief executive officer of American International Group Inc. A significant foreign investment remained a possibility.”

As quoted above, American Internationa Group also joined the investors league.

Original June 3 POST.

A LEHMAN CRISIS IMPLODES,

FOR HIGH 08Q2 LOSSES

As we had analysed in depth in mid-March (Bear Steans bail out, END OF FREE MARKETS days), on Fitch original data and a precious help by rge-monitor (always the best site on macroeconomics and finance), Lehman Brothers is the weak point, the first one to be under attack, among the 4 left purely financial US banks.

Therefore we read with no surprise this: its shares are now falling every day, from Monday June the 2nd.

WSJ

Lehman Is Seeking Overseas Capital

As Its Stock Declines, Wall Street Firm Expands Search for Cash, May Tap Korea
By SUSANNE CRAIG
June 4, 2008; Page C1

Lehman Brothers Holdings Inc., facing a sharp decline in its stock that will make it more difficult to raise fresh capital, may look to a foreign land for a strategic partner.

Still, the stock has fallen 18% in the past three sessions.

It was unclear how much stock Lehman Brothers bought back, but with shares trading at roughly 22% below its book value at the end of the first quarter, the buying could be seen as a vote of confidence by management.

WSJ, HEARD ON THE STREET

Decision Time for Lehman

Balance-Sheet Woes
Most Likely to Force
Big Strategic Shift
By PETER EAVIS and DAVID REILLY
June 4, 2008; Page C18

It is time to sort out the Lehman problem.

With its stock falling two days in a row, investors see Lehman Brothers Holdings Inc. as the latest firm weighing on financial stocks.

The problems in Lehman’s balance sheet could force the firm to issue a large amount of equity — or to sell part, or all, of itself to a larger financial firm. (…)

Lehman’s first option is to raise a large amount of capital. The Wall Street Journal reported Tuesday that Lehman was weighing whether to issue as much as $4 billion in new stock. But Tuesday’s drop in Lehman’s share price — the stock was down about 15% at one point during the day — makes it harder to sell new stock. (…)

There is another important reason why Lehman may need new capital: It likely needs extra cash to forestall another downgrade by ratings agencies.

(…)  Lehman’s other option is to sell a stake to another firm or to sell out completely. The problem here is that the credit crisis has left few prospective buyers.

WSJ, PAGE ONE

Losses Push Lehman
To Weigh Raising New Capital

By SUSANNE CRAIG
June 3, 2008; Page A1
June 3, 2008 — 7:04 a.m. EDT
      

Banks and Wall Street
Aren’t Out of the Woods

By JOSEPH SCHUMAN
THE WALL STREET JOURNAL ONLINE

It was a sobering day for anyone optimistic enough to think the shake-out for Wall Street and big banks was over, and today isn’t starting out any better.

The Wall Street Journal is reporting that Lehman Brothers, the smallest independent Wall Street firm still around after the Bear Stearns collapse, will soon report its first quarterly loss since the firm went public and is looking at ways to raise perhaps $3 billion to $4 billion in new capital to strengthen its balance sheet. Lehman was the subject of apparently unfounded credibility doubts right after Bear Stearns was bailed out and essentially sold, and Lehman executives continue to say the firm’s in good shape to handle the credit-market uncertainty. It has also already raised $6 billion in the past year, and has access to the Federal Reserve’s new borrowing facilities for investment banks, as the Journal notes. “Nonetheless, some investors remain concerned that relative to its size,Lehman is holding more securities tied to both residential and commercial real estate than any other big Wall Street broker,” the Journal says, citing Bernstein Research.

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3 CommentsLeave a comment

  1. […] a report attributed to "a source familiar with …Dealbreaker – http://dealbreaker.com/|||A run on Lehman Brothers might come at any timeAs we had analysed in depth in mid-March (Bear Sterans bail out, END OF FREE MARKETS days), on Fitch […]

  2. […] go to our – DAILY UPDATED – June 3 post, timely dealing with the current Lehman Brother involution and its next […]

  3. […] Erin Callan, 42, is known for being frank, fashionable. […]


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