Will LEH follow BSC? (Reuters article)

Discussion in 'Stocks' started by m22au, Mar 15, 2008.

  1. m22au


    Wall Street is all about trust, and Lehman Brothers appears to still have it -- for now, anyway.

    Fear that the company could suffer the same fate as Bear Stearns Cos hit its stock hard on Friday.

    But a half-dozen hedge funds that Reuters spoke to were not unwinding their trades with Lehman Brothers Holdings Inc, and said they had no trouble trading with it. Two dealers said they were conducting business as usual with Lehman.

    Bear, heavily exposed to the faltering US mortgage market, burned through cash and lost access to funding this week as clients pulled out assets and unwound trades.

    Lehman, the fourth-largest US investment bank, is more diversified than Bear, the fifth-largest. It has more than $US195 billion ($208 billion) of assets at its ready disposal and says it can fund its operations for 12 months without outside financing.

    But Lehman does have extensive mortgage assets, and one credit derivatives dealer, speaking on condition of anonymity, said his bank was pulling back on its exposure to Lehman, as were his clients.

    Rumors of funds unwinding positions with Lehman abounded, with everybody from risk management consultants to hedge fund managers to traders having heard them.

    Lehman shares were down more than 14% while shares in the top three US investment banks lost only 5 or 6%. Bear Stearns shares lost nearly half their value.

    Confidence is crucial to banks on Wall Street, which are trusted by investors to use borrowed funds wisely. The slightest whiff of trouble can quickly trigger a run on the bank.

    Even if clients leave, Lehman is likely in a better position than Bear. At November 30, Lehman had some $US35 billion of liquid assets, and another $US160 billion of assets it could sell if it had to.

    Lehman said on Friday it had closed on a $US2 billion, 3-year unsecured credit facility.

    But markets are broadly jittery now, all the more so after Bear said it needed emergency funding on Friday, getting a lifeline from the Federal Reserve Bank of New York using JPMorgan Chase & Co Inc as a conduit.

    ''It's very very damaging to psychology to have the fifth-biggest brokerage firm go from viable to practically defunct in a week because it makes people say, 'What about No. 4?''' Jeffrey Gundlach, chief investment officer of TCW Group in Los Angeles, which invests $US160 billion.

    Lehman spokesman Randall Whitestone said, ''Our liquidity position has been and continues to be very strong,'' adding that the company's standing plan to handle liquidity is a competitive advantage.

    Shares of Lehman Brothers lost $US6.73, or 14.6%, to close at $US39.26 on Friday. Bear shares lost 45.9%, or $US26.15, to close at $US30.85, also on the New York Stock Exchange.

    Lehman had $US37.3 billion of residential mortgage assets on its balance sheet as of Nov. 30, and another $US38.9 billion of commercial mortgage assets. These are big exposures for a firm with shareholders' equity, or assets minus liabilities, of about $US22 billion.

    Significant write-downs to the mortgage assets could eat through Lehman's capital base. Lehman, which reports first fiscal quarter results on Tuesday, is expected to post net income of 71 cents a share, according to Reuters Estimates.

    In topsy-turvy markets, many investors and dealers are less willing to take risks with banks they trade with.

    ''If Bear Stearns is on the brink of being insolvent, the fear would be that there might be other organizations almost as weak,'' said James Kochan, fixed-income strategist at Wells Fargo Funds Management in Wisconsin.

    The cost of protecting Lehman's obligations against default for five years surged to 465 basis points, or $US465,000 a year per $US10 million protected, from $US400,000 the day before.

    The cost of protecting other dealers' debt against default surged as well, most notably for Citigroup. But stand-alone investment banks, which don't have access to emergency Federal Reserve funding, are bigger risks, analysts said.

    Bear Stearns Chief Executive Alan Schwartz said on a conference call on Friday that his firm has essentially experienced a run on the bank, as growing rumors of credit problems spurred counterparties to unwind derivatives and other trades, and clients to withdraw funds from prime brokerage accounts.

    ''Rumors intensified, and given the nervousness in the market, people wanted to protect themselves from the possibility of the rumors being true,'' Schwartz said.

    Bear Stearns said on Friday it received an unspecified amount of secured financing from JPMorgan Chase & Co, which was backed up by the Federal Reserve Bank of New York.

  2. paden


    From LEH press release Friday

    “Liquidity and capital management continue to be core competencies that have enabled
    the Firm to be well-positioned in challenging environments.”

    JPM and Citi, and Chase, along with 37 others, gave them a $2b revolving line.
  3. ggoyal


    all that might be true. But they have been cutting people from their energy trading department and apparently they were good workers too. I think its good to trade LEH with a bearish view in mind and scalping it based on that.
  4. .......and we know they would't lie. Right?
  5. There seems to be a good case for BOGUS BONUSES....

    Which seem to have found their way into Manhattan real estate....etc....etc...wink...wink....
  6. m22au


    I have LEH down $8.25 (over 20%) to $31.01. I just wish I had hit the short button on Friday
  7. soler


    By Patricia Kowsmann

    SINGAPORE (Dow Jones)--DBS Group Holdings (D05.SG), Southeast Asia's biggest
    bank by market capitalization has asked several traders not to make new
    transactions with Lehman Brothers Holdings (LEH), people familiar with the
    situation said Monday.
    "DBS has sent an internal e-mail saying it would not deal with Lehman
    Brothers from now on. It said DBS shouldn't enter into new dealings with
    Lehman or Bear Stearns," one person told Dow Jones Newswires.
    Another person said that the email didn't mention anything about closing
    existing positions with Lehman, which appear to remain in place for now.
    Lehman Brothers told Dow Jones that the bank's liquidity position remains
    "Our liquidity position is and continues to be strong," Matthew Russell,
    head of corporate communications for Lehman Brothers Asia Pacific said.
    DBS' move comes after the near-collapse of Bear Stearns Cos. (BSC) on Friday
    amid a liquidity crunch triggered by a similar pullback by counterparties.
    JPMorgan Chase & Co. (JPM) Monday agreed to buy Bear Stearns for $2 a share in
    a bid to avert a bankruptcy by the U.S. investment bank.
    The $2 per share price tag for Bear Stearns has alarmed many, underscoring
    the trouble in the U.S. banking system and raising concerns that more
    financials institutions may be faced with liquidity problems. The stock was
    nearly $60 a share before news that it was facing a liquidity crisis was first
    Analysts at ING wrote to clients that shares of Lehman Brothers
    significantly underperformed the broad market on Friday - falling nearly 15% -
    and offered a clue as to which bank investors are worried about.
    Lehman may not get the support from the Fed that Bear Stearns did, they
    "We think the Fed was moved to provide lender of last resort facilities
    because it judged Bear's large prime brokerage business made it 'too big to
    fail' in the wholesale payments, clearing and settlement system. On the face
    of it, Lehman is not too big to fail," they said.

    -By Patricia Kowsmann, Dow Jones Newswires; 65 6415 4157;
    (John Jannarone contributed to this story)

    (END) Dow Jones Newswires
    03-17-08 0517ET
  8. m22au


    I don't completely understand the implications of LEH having access to the discount window, but my initial thoughts are that LEH is done by the end of next week.

  9. Sucks for LEH. Once Illiquidity rumours like these are out on the backdrop of BSC they can become a self-fulfilling prophecy. LEH might pretty well be toast as well.
  10. m22au


    I am just amazed at how self-fulfilling this all is. What will the Fed do to stop a run on LEH today?
    #10     Mar 17, 2008