Is Lehman in the Midst of a Bear Stearns-like Meltdown?

by: James West June 04, 2008 | about stocks: BSC / LEH    
James West

James West

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Lehman Brothers Holdings Inc. (LEH) shares continue to hemorrhage in value as losses mount from exposure to “very large, illiquid assets”. The fourth largest securities firm is expected to announce an equity sale to raise up to $4 Billion to replenish its supply of capital.

``We're in a market environment where sometimes perception becomes reality,'' Diane Hinton, an analyst at Standard & Poor's, said in a call with investors and journalists. ``We think there is increasing pressure on Lehman to address these concerns'' about liquidity and capital, Hinton said.

Monday Standard & Poor's cut Lehman's credit ratings by a notch, and said it expects a "relatively meaningful deterioration" in Lehman's second quarter results, adding Lehman's ratings could be lowered again if it had big losses because of poor business conditions or sizable write downs.

Ratings downgrades make it harder for banks to sell credit-default swaps tied to bonds or loans. Lehman had to put up another $200 million in collateral for its derivatives positions because of Monday's downgrade, and would have to post $5.2 billion more in collateral should it get lowered another notch, according to its first quarter financial statement.

Shares of Lehman lost 8% on Monday, and are down another 9.5% in trading Tuesday.

“It doesn’t have the Bear Stearns (BSC) feel to it, but people are getting nervous, options activity is picking up,” says Joseph Saluzzi, co-head of equity trading at Themis Trading. “They’re certainly the one in the hot seat right now, unlike Goldman (Sachs) (GS) or Morgan (Stanley) (MS).”

Is it conceivable that the venerable institution, that’s been in business since 1850, may fall in Bear Stearns-like meltdown?

It's exactly that potential that has investors heading to the exits in droves. “The market keeps pounding the stock,” says Mike O’Rourke, chief market strategist at BTIG.

On March 17th, the Monday after news that Bear Stearns would be bailed out by the Fed and JPMorgan (M), shares of Lehman sank as low as $20.25 on rumors they could be next. Reassurance from the company that liquidity was strong, in addition to the opening of the window by the Fed to investment banks, helped the stock recover to close that dreadful day at $31.75. The shares continued to climb after that, as Q1 earnings from Lehman showed that things weren't as bad as some had feared. That was until recently however. After recovering to about $50 per share, the stock is now back down to just over $30.

The major negative catalysts driving Lehman shares lower recently have included: short-seller David Einhorn headlines about the company's accounting for losses, major layoffs, analysts taking down estimates, realization that revenues/profits will be hard to come by for some time as a lot of business has dried up, no more fed rate cuts, and yesterday's reports of another capital raise.

Einhorn says the assets include an Indian-based energy company marked up between $400 million and $600 million in the first quarter, according to an article in The Wall Street Journal. He's also called into question the degree to which Lehman has marked down its collateralized debt obligation holdings, since only $200 million was lopped off from $6.5 billion of securities in the first quarter, even though around a quarter of these assets hold what is considered "junk" status.

Lehman shooed Einhorn's criticism away as nothing more than rhetoric designed to scream fire in a crowded theater. "Mr. Einhorn cherry-picks certain specific items from our quarterly filing and takes them out of context... which suits him because of his short position in our stock," stated a Lehman spokeswoman.

Speculation that Lehman might be the next Bear Stearns first bubbled up in mid-March, but eased after the firm raised $4 billion in capital via a preferred-share offering. The company absorbed $1.8 billion in mortgage-related write-downs during the first quarter, leading earnings to fall 57 percent.

Disclosure: None

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This article has 11 comments:

  •  
    Jun 04 09:45 AM
    The market and financials are on the way down. One reason is high commodities. George Soros talked about commodities bubbles yesterday. I write about it @ theinvestingspeculator...
    Reply | Link to Comment
  •  
    Jun 04 09:58 AM
    there is a diffrence between LEH and BSC and that is that the FED will help them as they are and will not force them to sell for $2 as they did with BSC for REVENGE that they didnt help with the LTCM fiasco.....
    Reply | Link to Comment
  •  
    Jun 04 11:25 AM
    atauber - I agree - BSC couldn't exchange junk for cash like current IBs can. If Fed hadn't opened window - LEH would be a goner. Still think they get taken out at much lower levels
    Reply | Link to Comment
  •  
    Jun 04 12:54 PM
    LEH should clearly quantify their 'exposure to “very large, illiquid assets”. ' and state their plan for dealing with it, take their lumps, and be done with it. So should WAMU and NCC, who are probably in much worse shape than LEH.
    Reply | Link to Comment
  •  
    Jun 04 03:39 PM
    But, I thought all the Wise Wall Street Conservatives said the market has "bottomed" and now is the time to buy!

    3 words:

    Ha. Ha. Ha.
    Reply | Link to Comment
  •  
    Jun 04 05:45 PM
    From May to June this year, I noticed the numbers of foreclosure homes drastically increased about 30% at Riverside of California ( from 3496 to 4433) and Las Vegas of Nevada (from 16119 to 21149). Similar downtrend is also noticed in Southern California, Arizona, and Florida. Since LEH got a lot of involvements and outrageously high leverages on the house mortgages, as long as this housing market does not reach the bottom, LEH has more downdays to come. High commodities is throwing in more oils into this fire. I do not think LEH can survive this burn of credit crunch.
    Reply | Link to Comment
  •  
    Jun 04 09:20 PM
    It's a buyer's market! Strike that. It's a sucker's market. Is (financial) Armageddon coming? I was in front of the New York Stock Exchange when the news of the Bear Stearn bailout broke. It was scary. A lady reporter was doing a story about it. I could tell by what she was saying and the tone of her voice that it was a very serious, dire situation. Later, certain economists said that financial disaster (Armageddon) was averted by the bailout of BSC. Now Nouriel Roubini and others say that the party celebrating the end of the credit crisis was premature. It is possible that the Great Depression of the 21st century lies ahead. Americans are being assailed from many sides...rising prices (inflation), home prices falling like a rock, rising unemployment, the falling dollar, home forclosures, and more. My thinking about stocks has changed over the last couple years. I used to think that stocks were a way to "save" for retirement and make money. Sure, sometimes people DO make money, but many times they LOSE money. Lose bigtimme. NOW I THINK THAT INVESTING IN STOCKS IS JUST LIKE GOING TO LAS VEGAS - IT'S GAMBLING. You may gain, but you may lose as well. In fact, maybe like Las Vegas, you are more likely to lose than to win.
    Reply | Link to Comment
  •  
    Jun 04 10:42 PM
    I’m definitely in the wrong business. I should have been an upper six figure analyst at Standards & Poor's and been paid to wordsmith phrases such as "relatively meaningful deterioration".

    Translation; “These guys just may go tits up.”
    Reply | Link to Comment
  •  
    Jun 05 06:23 AM
    One thing to bear in mind with Lehman's, is that it can use its FED facility to swap illiquid AAA assets. However, how many of their assets will be AAA if the monolines are downgraded?
    Reply | Link to Comment
  •  
    Jun 05 10:44 AM
    hello-i have been saying that wall st. is just a slower vegas or indian casino. you cant trust anyone or anything (well mabe buffett.he can afford honesty) & if you agree it might help you.
    Reply | Link to Comment
  •  
    Jun 05 10:47 AM
    Mr. Amok,

    Well said and in verbage I can understand on one pass.

    While the braintrust at LEH has already picked a fall gal
    for the job of layering lies and dreaming up more language
    for the lazy......the Fed, again, will not let this outfit fail.

    "You wanted the big bucks sis......now show 'em your stuff !"

    Nothing less than Devil's Island is suitable for these fakes.

    "Hey !!! There's always the Fed. "But your spokesman (and
    with a fiduciary role) said........
    Reply | Link to Comment
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