Lehman Bombshell: Erasing Eight Years of Gains
Posted Jun 09, 2008 10:24am EDT by Henry Blodget in Investing, Banking
Related: leh
From Clusterstock, June 9, 2008:
Lehman Brothers (LEH) is smart to raise another $6 billion, and the move will probably save it from succumbing to the same fate as Bear Stearns. Given the terms on which Lehman is raising the money, however--$28 a share for the common stock component--this is clearly a fire sale (despite Lehman's protestations as recently as late last week that it "didn't need" capital).
The firm's massive write-downs in Q2, moreover, show that it badly underestimated the state of its balance sheet and the size of the capital infusion it would need to get through the crunch.
Lehman's management, starting with CEO Dick Fuld, will likely continue to frame the firm's problems as an act of God--an unforeseeable "perfect storm" or "100-year flood" that management should be congratulated for surviving.
Please.
Companies can--and should--be built to survive storms, and Lehman apparently wasn't. The firm made its biggest mistakes when everything appeared to be going well--by taking on too much leverage and crappy debt. That the firm has reacted to the crisis with more urgency than Bear Stearns is fortunate, but this doesn't let management off the hook for getting into this mess in the first place.
Lehman's crisis has wiped out the past 8 years of stock gains, and the rescue will dilute current shareholders by up to a third. Lehman's management needs to take responsibility for that--by stepping down. Once they're gone. new management can begin to rebuild the firm's credibility.
Lehman (LEH) Deathwatch: Former CFO Says Some Clients Now Wary (LEH)
Henry Blodget | June 6, 2008 9:38 AM
richardfuldbig.jpgIf Lehman Brothers (LEH) goes the way of Bear Stearns, it will not be because Lehman is facing a liquidity crisis but because of the perception that Lehman is facing a liquidity crisis.
Specifically, nervous clients will demand their money and take their business elsewhere, which will immediately drain Lehman's liquidity reserves and create a liquidity crisis (Bear Stearns burned through $18 billion in a couple of days when clients began running for the hills). This is why Lehman's insistence that its liquidity remains strong is largely irrelevant, except insofar as it persuades clients not to flee.
Thus, a report this morning from Brad Hintz of Bernstein, who used to be Lehman's CFO, should put the fear of God in Lehman and its employees (below). As described earlier, Lehman is now reportedly considering moving its Q2 earnings release up to dampen fears of a liquidity crunch and raising several billion of emergency capital through a rights offering. These are good signs, but Lehman had better move quickly. As Bear Stearns demonstrated, confidence (and capital) can erode with alarming speed. Marketwatch:
Some of Lehman Brothers' counterparties are limiting trading with the brokerage firm because of persistent concerns about its capital and leverage and a recent credit rating downgrade, Brad Hintz, an analyst at Bernstein Research, said on Thursday.
Fixed income counterparties have become more discerning about which Lehman subsidiaries they will trade with," the analyst wrote in a note to clients. Lehman's main operating subsidiaries in the U.S., United Kingdom, Japan and Germany are still being fully accepted by the market, Hintz noted.
However, cautious credit officers at clients of the firm are limiting trading with its unregulated derivatives subsidiaries, said the analyst, a former Lehman chief financial officer and Morgan Stanley treasurer.
Hintz does not believe this client wariness will kill the firm, just hit earnings. But if you've ever wondered how runs on the bank start, this is how they start.
"In the near-term, we expect this pullback by counterparties will hurt the earnings of the firm's fixed income, equities and commodity derivative franchises," Hintz added. The analyst cut his third-quarter and fourth-quarter earnings estimates by 11 cents a share each to reflect this. |
