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Lehman: We're Not Bear, and We're Not Screwed
Posted Mar 17, 2008 12:24pm EDT by Henry Blodget in Investing, Recession, Banking
From Silicon Alley Insider, March 17, 2008:
After reading our "Lehman Too Big To Fail?" post this morning, a high-level Lehman insider quickly reached out with two key reasons why Lehman (LEH) isn't in the same predicament as Bear Stearns (BSC). (Pictured at left, Lehman CEO and Chairman Richard Fuld.):
We're not experts in mid-hurricane broker-dealer balance sheet analysis, so we'll leave the dissection of these arguments to those who are (anyone?). In the interests of balance, however, we did want to add a follow-up to our earlier note.
Analysts: Lehman Not Bear
Deutsche Bank's Mike Mayo:
"Lehman is Not Bear. 1) It has more liquidity, 2) It has support among its major counterparties, evidenced by an extension on Friday of a $2B working capital line with 40 banks (one issue w/Bear Stearns [BSC] seems to be that counterparties pulled in lines). 3) Its franchise is more diversified given almost half outside the US and an asset management business that is more than twice as large relative to its size (BSC was more plain vanilla). 4) It has a seasoned and experienced CEO (Bear's CEO was new). We maintain our Buy rating given a belief that LEH will weather this storm and our estimate of a price to adj. book value ratio of 83%.
"The industry issue seems more liquidity than solvency, and LEH protected itself more fully after it's problems similar to BSC in 1998. At year-end, it had $35B of excess liquidity combined with $63B of free collateral, implying $98B available for liquidity, or $70B more than needed for $28B of unsecured short-term debt (which includes the current portion of long-term debt). While it also has $180B of repo lines, we take comfort that 40 banks extended credit on Friday and believe that some of the repos are likely to be termed at least to some degree."
Buckingham Research's James Mitchell and John Grassano:
"Given the rapid deterioration of liquidity at BSC last week, we thought it was paramount to evaluate the liquidity positions of the other four major stand alone broker dealers. While we never thought it would come down to such a dire scenario (admittedly our mistake) -- a company with $35 billion in liquidity effectively being shut down -- through this analysis it seems clear that BSC was in a somewhat uniquely challenging situation when the market's confidence in the company vanished.
"For example, as noted above, total liquidity (cash, other liquid assets, and the borrowing value of unencumbered assets) at BSC was $35 billion. As a percentage of total assets, this was the lowest in the group at 9% and the only broker dealer to be below 10% - despite being the smallest firm. In contrast, the second smallest firm, Lehman Brothers (although double the size of BSC), has the highest percentage of liquidity at 25% of total assets.
"Secondly, we would point out that BSC had significant 'net' repo borrowing positions (repo financing minus repo lending) of $74.5 billion - more than double its liquidity position and compared to just $19 billion at LEH. In other words, as other firms refused to provide repo financing to BSC, the company didn't have enough overnight repo loans outstanding that it could call in to repay the financing. This mismatch put a significant strain on cash in the short-term as competitors terminated repos. While BSC had a significant net lending position in its securities lending/borrowed book, securities lending agreements are typically longer than overnight (unlike most repos), and thus could not be pulled fast enough to pay down the repo lines. And even including the securities loaned/borrowed, BSC was the only broker in a 'net borrower' position in terms of collateralized agreements (all other were in a net lending position).
"Lastly, BSC's sizable prime brokerage business also contributed to its downfall. And we can see that in the "net payables" data. Customer payables include, among other things, free credit balances of prime brokerage clients. With gross payables of $87 billion and net payables of $35 billion, this was a sizable liability for an institution the size of BSC. Basically, when prime brokerage and clearing clients made a 'run on the bank' (i.e. demanding their cash balances back), this put an additional and sizable cash burden on BSC."
(Pictured above: Lehman Brothers CEO Richard Fuld.)
39 Comments
Robert - Monday March 17, 2008 12:46PM EDT
I don't believe what anybody says anymore. We'll just have to wait and see. I own Lehman stock, unfortuantely,
madmilker - Monday March 17, 2008 12:54PM EDT
in other words....the a!!holes get bail out by "we the people" and the fat cats on Wall Street don't have to eat all that paper lost that some dumb a!!hole that wus thinking with his prick and not is brain spread around three continents. this has to be the biggest shell game of the past 246 years and the American people are to dang busy buying cigarettes, beer, lottery tickets and Vaseline to speak out......and that is sad!
fazil - Monday March 17, 2008 12:55PM EDT
The name of the game: private clients running on the bank will go back to the extremely tarnished realestate market and put an end to the morgage crises. Thats why JPM took over BSC to prevent the firesale of demolished or nearly vanished morgage loans that will recover very quickly. At the end of the day european banks have more dollars than before to secure any urgent financing and the US economy created several more instruments to securitize extreme market fluctuations. This is a very big plus to the financial market. LOOK closer to the US market --it is BUY BUY BUY never been so cheap. this is my true opinion Winners are naturaly bullish KORG
kekoajs - Monday March 17, 2008 12:57PM EDT
I shorted the hell out of this stock last week friday. Since then i've had a 40% return. Don't worry, I'm not contributing to the actual fall since I bought it with fake money in an online trading game. I feel sorry for those of you who were misled about the state of the financial industry. You really can't get good advice on that industry by going to your financial planner, because, well, they are paid by that industry. :(
Shannon K - Monday March 17, 2008 01:00PM EDT
In the last two weeks I've seen two CEOs come out and say their compaines were fine and then within a week. They have hit the dirt. Nobody can say until everything works itself thru. Which will take at least another 12 to 18 months.
Yahoo! Finance User - Monday March 17, 2008 01:04PM EDT
"fat cats" Esqueeze me? I own Lehman stock and I'm no fat cat. 70% of stocks in the market is owned by regular joes like me. You can argue that bailing us regular folks out is bad if you like. But don't pretend it's "fat cats" that are being bailed out. It's regular folks and the ENTIRE ECONOMY that is being rescued.
Yahoo! Finance User - Monday March 17, 2008 01:09PM EDT
"fat cats" Esqueeze me? I own Lehman stock and I'm no fat cat. 70% of stocks in the market is owned by regular joes like me. You can argue that bailing us regular folks out is bad if you like. But don't pretend it's "fat cats" that are being bailed out. It's regular folks and the ENTIRE ECONOMY that is being rescued.
Henry - Monday March 17, 2008 01:13PM EDT
Thanks, investinservices. I think the real lesson here is that no one's an expert in dissecting broker-dealer balance sheets in the middle of a financial hurricane. A week ago, Wall Street's sharpest analysts thought Bear was worth $60+.
Fe2O3 - Monday March 17, 2008 01:16PM EDT
It's totally a wait and see guessing game. They all have loans on overvalued property. We'll see whether it's enough to sink them. I've been burned enough as an employee or investor to know better than to listen to anything company execs have to say. After his speech, he may be packing his boxes right now.
Yahoo! Finance User - Monday March 17, 2008 01:18PM EDT
I wonder how much bonus the CEO of BSC will get ?.
__A_YAHOO_USER__ - Monday March 17, 2008 01:24PM EDT
Bailing out a bank like bear isnt about saving investments that people have in that bank. It is much bigger. It is about about averting systemic meltdown of the american finacial industry. Any such meltdown could be very painful to even those who havent even heard of wall street. So it is Fed saving common american and not the fat cats.
6611mark - Monday March 17, 2008 01:28PM EDT
stovks are going lower, lower and lower, sell now
Yahoo! Finance User - Monday March 17, 2008 01:30PM EDT
madmilker57 is right. Greedy companies overextended themselves to make profits. They failed and the government (taxpayers) are there to help them out. You know why the governement cares about wall st? They don't want their own pensions to lose value. Banks pushed ARMs and let people borrow above reasonable limits - all to make money. 90% or more of the people who got ARMs knew what they were doing. That backfired on them. Government to the rescue! Being fiscally responsible is so last century. Take a shot at the big time everyone, because you won't be held accountable. At worst you can declare bankruptcy. Take a shot to live like the Hollywood celebs that are glorified on TV every day...and twice a month at award shows. Screw over everyone and anyone to make money. As long as you get to drive an entry level luxury car like your neighbor's teenage daughter. ...this is fun.
Yahoo! Finance User - Monday March 17, 2008 01:31PM EDT
madmilker57 is right. Greedy companies overextended themselves to make profits. They failed and the government (taxpayers) are there to help them out. You know why the governement cares about wall st? They don't want their own pensions to lose value. Banks pushed ARMs and let people borrow above reasonable limits - all to make money. 90% or more of the people who got ARMs knew what they were doing. That backfired on them. Government to the rescue! Being fiscally responsible is so last century. Take a shot at the big time everyone, because you won't be held accountable. At worst you can declare bankruptcy. Take a shot to live like the Hollywood celebs that are glorified on TV every day...and twice a month at award shows. Screw over everyone and anyone to make money. As long as you get to drive an entry level luxury car like your neighbor's teenage daughter. ...this is fun.
Amit - Monday March 17, 2008 01:32PM EDT
What will happen to Lehman..Is tomorrow is D day for LB
Yahoo! Finance User - Monday March 17, 2008 01:33PM EDT
It seems the media is more interested in the prostitutes of New York than the prostitutes of Wall Street..........
Kimo - Monday March 17, 2008 01:35PM EDT
hmmmm, at $2 a share, why don't Bear's employees buy up the company...as the biggest shareholders(35%?), they already lost the most; whats another 6 or 7 bucks then have a go at it.
Rich - Monday March 17, 2008 01:35PM EDT
The dreaded vote of confidence usually sounds the death knell. We'll see a few more run ups to allow savvy investors to sell off before the big run hits. Most little guys have the deer in the headlights look after the last 90 days listening to Der Fuehrer, er, George W. Bush, tell us the economy is on "sound, financial footing". Advice? Listen to Dumya and then GO THE OTHER WAY!!!
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Mike - Monday March 17, 2008 12:42PM EDT
Nice way of owning up to your inadequacies… If you're not an expert, why don't stop making uninformed, sensational headlines. You failed Securities Analysis 101 once, and proved again this AM, that you haven't learned all that much. Stick to evaluating IPODs, Mac Airs, and Wiis….save us all a headache you douche.