Sunday, March 16, 2008

Is Lehman Brothers next?

I want to thank Nouriel Roubini for this excellent research.

"Bear is only the first broker dealer to go belly up. Rumors had been
circulating in the market for days that the exposure of Lehman to toxic ABS/MBS
securities is as bad as that of Bear: according
to Fitch
at the beginning of the turmoil Bear Stearns had the highest toxic
waste ("residual balance") exposure as percent of adjusted equity on balance
sheet; the exposure of Bear was 54.5% while that of Lehman was only marginally
smaller at 53.3%; that of Goldman Sachs was only 21%. And guess what?
Today Lehman
received a $2 billion unsecured credit line from 40 lenders
. Here is another
massively leveraged broker dealer that mismanaged its liquidity risk, had
massive amount of toxic waste on its books and is now in trouble. Again here we
have not only a situation of illiquidity but serious credit problems and losses
given the reckless exposure of this second broker dealer to toxic

My take:

Well It looks like we know where the next bank blow up is. I found the timing interesting that Lehman quietly borrowed $2 billion from 40 banks knowing that Bear Stearns would take all of the news on Friday. Also, why did it take 40 banks to lend mighty Lehman a measly $2 billion dollars. Not exactly a show of confidence in Lehman from the banking sector. Lehman looks very very shaky. I think this has a good chance of happening especially after reading this Bloomberg piece.

Full article:

"March 15 (Bloomberg) -- S3 Partners LLC moved $25 billion of clients' assets
from Bear Stearns Cos. to other brokers in the past three months, the Wall
Street Journal reported, citing S3 managing partner Robert Sloan.Renaissance
Technologies Corp., which oversees more than $30 billion, also shifted its
assets from Bear Stearns to other Wall Street rivals in the past week, the
newspaper said, citing unnamed people close to the matter. The report didn't
give a figure.Debt investors yesterday also became ``more cautious''
about Lehman Brothers Holdings Inc., with the cost of five-year credit-default
protection on Lehman's debt rising to $450,000 annually for every $10 million in
debt, up from $395,000 the previous day, the Journal said.
wanting to buy this protection on Bear Stearn's debt at one point had to pay as
much as $1.1 million upfront to sellers and agree to pay $500,000 annually for
five years for the insurance, the newspaper said."

My take:

Why such a rapid increase in the cost to insure debt from one day to the next? Running low on cash perhaps?? Another question I have is why do debt investors pay insurance for something when they think a company might be insolvent? Insuring debt with insurance that most likely will never be paid sounds like a big waste of money.

Lehman looks like they are hangin on by a thread. If you own this stock, Run Forrest Run!! The speed at which all of this is happening is frightening. One more thing to take into consideration here is Lehman is a much larger bank then Bear Stearns. If they go then you can assume no IB is safe other than perhaps Goldman Sachs who managed their risk and is the best firm on the street. Have a great afternnon!

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