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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
DC - Monday March 17, 2008 01:39PM EDT
Yeah, but "Yahoo! Finance User" -- it's like using your own money to bail yourself out.
Yahoo! Finance User - Monday March 17, 2008 01:45PM EDT
Trickle down economics doesn't trickle down very far. This is about fat cats. Let them fail - to weed out the bad decision makers. If the financial system is failing - there needs real changes, not coverups. The government is playing god.
D - Monday March 17, 2008 01:46PM EDT
Unfortunately, the crazy no job, no asset, no income loans, neg-amoritzations, all kind of loan products, and now we are seeing the results. These same jerks have walked away from their property purchases and left everyone else with the bill to pay. Pay your bills!!!!! I have a hard time believing anyone thought they could make money on people who refuse to take responsiblity for their actions. The result is all of us will pay and not just the government bailing them out. We are just about at the point of October 1929- and the depression. We have the ability to stop this and start picking out the people who caused this and those are the people who are not paying their housing payments because they have some excuse as to why they can't ---- B.... S.....! They signed the contract even if it was stupid they should have paid attention to what they were doing.
Yahoo! Finance User - Monday March 17, 2008 01:46PM EDT
I am getting tired of reading the postings by the "grave dancers". If you have nothing of substance to add to the discussion -- then go back to waiting tables. By the way "mmichraid" did you know that what you posted could be construed as "investment advice"? Are you licensed? Did you know that in today's system that you could be sued and held liable for any losses someone might have from following your public recomendation? Frankly - I am in there buying today. They may go lower in the short run but I believe that 6 months to a year from now I will look like a genius.
Carlos - Monday March 17, 2008 01:56PM EDT
lehman doth protest too much. we shall see who bites the dust over the next few months..
Nitin - Monday March 17, 2008 02:01PM EDT
Amazing, a Company with 70$ book value is being brought over for 2$. Why?? What about all the gulf/Asian banks , I am sure they must be willing to pay at least book value for bsc. Why didn't fed allowed bsc to borrow money from it last week, why this special privilege is opened after bsc is stolen by JPM?? This is politician & wall street nexus, everybody made money in this, except the poor stupid baby boomer joe, who probably retired, no assert value and is likely to end up begging for food. US stock prices appears cheap but considering that most corrupt & dishonest people are running both government and wall street, and policies are manipulated for select few, wall street is very very high risk investing.
Yahoo! Finance User - Monday March 17, 2008 02:02PM EDT
Wall St. cheered Spitzer scandal because he was trying to reduce the fraud within the institutions. Sure he was a jerk, but they cheered because the watchdog is now gone. They can go back to screwing everybody over to make money. yay!
Dev - Monday March 17, 2008 02:07PM EDT
sorry guys..its all a scam. the guys who created this are profiting off it from shorts because they knew. I know a lot of those guys...they knew
benny b - Monday March 17, 2008 02:07PM EDT
It is sad that you cant believe anything these days about the market. Its just a matter of time before the foreign countries get even on this polished up sub-prime mess that they bought into. We might be winning alot of battles in the middle east but we are losing the war. THE PRIZE. the good ole USA. $110 oil , Dollar worth nothing. Market in shabbles. Cant trust anyone in the market. Foreign countries could unload them dollars this week, then you can stick a fork in it, it will be done and over with. I can go to the pet store and buy a monkey and he can pick better stocks than a lot of brokers. The monkey wont have to put any money in anybodys pocket and wont be asking for any either.
Mary - Monday March 17, 2008 02:09PM EDT
If Lehman is in such great shape why is the stock down 20 points today.
Amitabh - Monday March 17, 2008 02:22PM EDT
These comments come from a Deutsche Bank analyst. I wonder how many shares of Lehman does Deutsche Bank hold. http://finance.yahoo.com/q/mh?s=LEH Hint, Deutsche Bank owns 7.1 million shares of Lehman. I wonder if the analyst really means what he says, or if he is simply trying to hold the stock price up while the 7.1 million shares are unloaded.
david - Monday March 17, 2008 02:26PM EDT
so the market is going to see how low it can drive lehman's price; at which point and at what price do jp morgan's shareholders get to buy it for peanuts with a backstop provided by the taxpayer, and does anyone else get to bid on it too, or does jp morgan get it by default? if so, how come? if i was a citibank shareholder i would want to know why jp morgan get all the breaks?
Chuck - Monday March 17, 2008 02:31PM EDT
Leverage, ah sweet leverage! This poison has a particularly sweet taste! Very hard to resist! Why settle for a mere straight earning of the simple yield when you can multiply it by 2, 4, 8, 16, or a whopping 32 times? I read somewhere that leverage, albeit wearing different clothing is one of the factors that brought the market down in '29. Another was mass hysteria... What are the regulators regulating if not the use of this potentially devastating practice? Interesting to me that the high-rollers are practically tripping over themselves to pounce upon the slow movers (or slow learners...).
Ryan - Monday March 17, 2008 02:53PM EDT
If Lehman is so different than Bear, then why is Lehman down 40% today? I think the market as a whole is smarter than any individual analyst, employee, director, etc...
Robert - Monday March 17, 2008 02:56PM EDT
The Real Fat Cats who have plenty of extra money to spare will make a Lot More Money to cash in on the Dilemma that was created in the Stock Market and caused the Small Investor to be "Screwed Blued and Tatooed" because the Idiotic CEO's that run the Big Banks Lent Money to folks that could not afford it with a "Dream to Own a Home" and most of them will not realize it because of the CEO'S (that control the Banks) GREED FOR MORE MONEY. I believe the Tremendous Fall in The Market was a Well Planned Out Scheme to Screw the Small Investor so that the Fat Cats could really Cash In Big Time. I have Stock in TSCM, AYR AND F and will stick it out holding them until Hell freezes over. My question is "What Idiot would Lend out Money to Someone that has a Poor Credit Rating". Not Me For Christ's Sake but the Banks did !!!. .
__A_YAHOO_USER__ - Monday March 17, 2008 03:05PM EDT
What a crock of crap, that the Feds would allow this to go thru, Who do they think we are, a bunch of dopes,? This has been all set up, You better watch your money. Cash is King., and bull is what they are spreading around. When they talk about the Goverment, people forget, We the little people are the goverment. There are more of us. than Jamie Diamon's Thanks a lot guys, you've done a good job, Read the bible, its all in there. Come quickly Lord Jesus.
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Henri - Monday March 17, 2008 01:37PM EDT
When poor people get screwed by an unfortunate Hurricane (Katrina), they are called DUMP, Stupid and RETARDS. When Straight A-Students, Harvard Graduate and well paid billionaires get screwed by their own miscalculations they are bailed out by the tax payer's money. With the blessing of a government, that didn't even acknowledge that Katrina existed. Yes, we need CHANGE in this country.