Is it time to go long Lehman Brothers?

Good Afternoon!

Let me preface this post by saying that no I have not been smoking crack and I didnt drink a case of wine before typing this post! I gotta admit though after reading the Financial Times today, going long Lehman has a nice risk/reward if they can pull off this sale without going BK.

Here is the Financial Times piece:


"Lehman in talks to sell $40bn in real estate
By Henny Sender in New York
Published: August 15 2008

Lehman Brothers is in talks with potential buyers over the sale of its $40bn portfolio of commercial real estate assets and securities in an effort to replenish its balance sheet.
People who have been in the discussions say the troubled investment bank wants to sell the assets either as a whole or in pieces but added there was a gap between Lehman’s perception of the value of the portfolio and that of buyers

In a move to lure buyers, Lehman has offered to shoulder the first $5bn of any losses suffered on the portfolio’s assets following a sale, they said.

If the sale talks fail, Lehman is believed to be considering spinning off the entire commercial property division and listing it separately, people close to the discussions said.

Such a move might not raise much fresh capital but could help Lehman to dispel the concerns over its balance sheet and financial health that have dogged it for the past few months.

Since May 15 its shares have fallen by about 63 per cent while the S&P 500 index of financial stocks has dropped about 20 per cent.

Lehman, which has raised more than $13bn in capital after suffering credit-related writedowns and losses of more than $8bn, is expected to make a decision by the time it reports third-quarter results next month.

Those who have held talks with Lehman on the fate of the troubled division include BlackRock, Blackstone, Colony Capital, and J.E. Robert Companies – all of which have large real estate portfolios.

Lehman has been slow to deal with its commercial real estate portfolio, which the company valued at almost $52bn at the end of November and was worth $40bn at the end of May.
The portfolio includes mortgages and mortgage-backed securities that were valued at $29.4bn as of May 31. It also contains real estate assets worth $10.4bn at the end of May.

The scale of the operations is huge when compared with either Lehman’s market capitalisation of about $12bn or its balance sheet.

Lehman declined to comment. People close to the discussions said no final decision had been made on the commercial real estate portfolio."

My Take:

Let me preface this by saying buying Lehman here is very risky trade. However, there are several reasons why I think this makes some sense. If Lehman does this and can still say solvent, then they have essentially will dumped all of their real estate risk onto someone else's balance sheet.

Remember one thing about the investment banks. They are much smarter than the buyers they are selling too. They also have a history of rarely holding the bag when its all said and done. I have been waiting for news like this. This tells me that the IB's are capitulating on this toxic mess, and they realize its time to clean up the balance sheet before the regulators do.

Now will Lehman be hurting for years? Of course! However, dumping these assets will almost assuredly guarantee Lehman's survival. This alone should move shares higher.

Another thing to consider here is George Soros just took a huge position in Lehman and he is as bearish as anyone on the economy.

Fuld(Lehmans Chief) is also considered one of the best and brightest executives on Wall St. If this sale goes through, then I think we have a nice entry point on a stock at a distressed price.

Buying this stock here is not for the faint at heart! My position here will be small due to the risk.

Distressed sales will be bad for homeowners

When the massive sales of distressed assets(including foreclosures) start, the effects will be chilling. Fannie has 54,000 homes in Cali that they need to sell. If they decide to start selling these foreclosures in the thousands to distressed asset buyers, you can say goodbye to housing values. Some of these homes will be bought for pennies on the dollar.

Homeowners that live in the neighborhoods where these houses are will watch their comps get destroyed literally overnight.

Capitulation in housing seems to be approaching as Wall St. realizes the jig is up.
Its about time for the fireworks!

Stay tuned.