What an interesting day in the stock market. It was rough session for the financials as speculation and rumors ran wild that Lehman Brothers was potentially getting hit with a run on the bank.
The market seemed to trade in tune with the stock price of Lehman for most of the afternoon. Lehman ended up down around 10% on the session. Stocks rallied back slightly after Lehman denied the rumors that they had run to the discount window to borrow cash from the Fed.
I gotta say I have a hunch that this story isn't over guys and gals. I found Lehman's denial to be very vague and carefully worded.
Here is the denial and the Lehman story tonight on Bloomberg. Here are the highlights including the denial from Lehman:
"June 3 (Bloomberg) -- Lehman Brothers Holdings Inc. denied borrowing from the Federal Reserve today and said the firm's cash holdings have increased, as the shares dropped to the lowest level in five years.
Lehman, the fourth-largest U.S. securities firm, had more than $40 billion of liquid assets at the end of the quarter, up from $34 billion three months earlier, Paolo Tonucci, treasurer of the New York-based firm, said in an e-mailed statement. The last time Lehman borrowed from the Fed was on April 16, he said.
``We did not access the primary dealer facility today,'' Tonucci said in response to speculation among traders that the firm had turned to the Fed for funds. The central bank set up a lending program for investment banks after the collapse of Bear Stearns Cos. in March.
``Equity investors are acting first and asking questions later,'' said Brad Hintz, an analyst at Sanford C. Bernstein in New York, who has a ``market perform'' rating on Lehman. ``Just the fact that Lehman would discuss the prospect of raising common equity capital nine months after the beginning of the credit problems is concerning to investors. Why take a chance in a difficult economic/financial environment?''
``Wall Street is starting to look like the boy who cried wolf, and investors are worried that we're not in the clear,'' said Billy Groeneveld, head trader at vFinance Inc. in Boca Raton, Florida. ``The bottom line is that we are still on shaky ground in the financial sector and it's not just Lehman.''
My Take:
Take a good look at the statement in bold above from Lehman. Ok, so their "liquid assets" rose from $34 billion up to $40 billion. Here is my question. How many "illiquid" assets do you now have on the books Lehman?
How many bad assets have you thrown into the abyss that you like to call Level 3 assets? On their March conference call noted here, Lehman admitted to having $38 billion in Level 3 assets. What is that number up to now? $40 billion in liquidity against and $38 billion in Level 3 assets is not where you want to be as a financial institution.
As you can see they are in a world of hurt.
Another question that I have is how many bad assets do you have on the books that are not in Level 3 lala land that you have to writedown over the next few quarters? All of the analysts are expecting Lehman to announce a loss for the second quarter.
Another problem that Lehman has is apparantly the hedges they used to balance out their housing exposure backfired as the financials have rallied since March. This has supposedly done furthur damage to the firm.
As houses continues to drop in value, the $38 billion in Level 3 assets that Lehman holds drop in value with each foreclosure. The reason being, a lot of these Level 3 assets are garbage CDO securitizations that Lehman hopes will come back when housing rebounds. Like that's going to happen anytime soon!!
I thought it was also strange how they only would say that "We did not access the primary dealer facility today". Well how about tomorrow? Sounds a little vague and lacking in confidence doesn't it? I recall how Lehman was full of piss and vinegar the last time this rumor started, blaming the shorts for trying to create a run on the bank. Quite a docile response this go around versus last time don't you think?
Bottom Line:
When you see price action on stocks like this there is usually a reason for it. Like the saying goes "where there is smoke there is usually fire!".
8 comments:
Look at this from Reuters tonight.
Lehman is in DEEP trouble. They were buying back their own shares today when the stock dropped blow 30.
Talk about desperation!
"SAN FRANCISCO, June 3 (Reuters) - Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) began using its capital to buy back its shares in the wake of its falling stock, the Wall Street Journal reported on Tuesday, citing a person familiar with the matter.
It was unclear how much stock Lehman bought, the Journal said.
Lehman may also look to sell a stake to a group of investors and has held talks in recent days with at least one foreign entity, the Journal reported, citing a source.
Lehman's stock closed Tuesday's session down 9.5 percent, or $3.22, at $30.61 on the New York Stock Exchange."
Great coverage, Jeff! These guys are over. There's absolutely no question on this one.
Minton
Today is goin got be interesting. Europe wis way down overnight led by the financials.
Big bearish bets were made overnight that Lehman has further to go and needs capital.
They are over in South Korea trying to raise capital.
Cost for credit default swaps for Lehman's debt are also up sharply. They could be toast shortly depending on how much capital they can raise.
Working on a post for later but have some work this morning.
Somehow I doubt they will go down, but if they do than look for JP or Goldman to extend the "helping hand".
Anon
Good point. The Fed could always generate a stick save and set up another Bear Stearns type merger.
I don't think JP Morgan would buy Lehman and take on all of those bad loans without the Fed bailing out the bad debts.
The question here is will the Fed consider the "moral hazard" of continuing to save every bank thats in trouble.
Their balance sheet is also getting squeezed and running out of cash. It will be interesting to see how they will react.
Jeff,
If I recall correctly FED was created for purpose of eliminating Bank runs by providing the banks in trouble with money, so it's FEDs job to help failing banks and it's not a "moral hazard".
Further more I find it an interesting fact that Lehman was buying back their own shares.
Which could only mean two things:
1. they're scared for their equity to be shorted (or naked shorted) and lose even more stock price so their buying back the stock to decrease volume avaliable on the market.
or
2..
Anon
The Fed is there to help, but to a point. The "moral hazard" here is by creating so much liquidity to save the banks, you run up inflation which then destroys wealth and potentially, the economy.
When you create price inflation you destroy the consumers ability to consume.
So in effect you save the banks at the peoples expense. This is why you see food up 40% and $130 oil.
Regarding buying your own stock. this was commonly done during the Great Depression when you have no other options.
Its a move of desperation to keep things propped up. Countrywide did this last year and now the stock sits at $5 and would be at 0 if BAC didn't decide to save them.
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