Why Lehman Brothers Is Not Bear Stearns

From the WSJ‘s Market Beat:

Despite similarities in equity and credit markets’ perceptions of Lehman Brothers Holdings this week with views of Bear Stearns in its crisis of confidence during the week ended March 14, there are some glimmers of hope for Lehman in the differences.
The magnitude of Lehman’s drop in the stock market and the widening of the spreads in the market for insuring against events of default certainly recall Bear’s last days. The major difference between Bear and Lehman is continued faith in the latter’s short-term liquidity.
That may explain why the equity-options market on Lehman pivoted Wednesday, and some traders appeared to bet on the firm by buying call options. About 15,700 contracts giving the right to buy Lehman stock for $12.50 a share in October changed hands Wednesday, outweighing open interest. Even as the stock trades down 32% to $4.92, a greater number of calls have traded than puts, suggesting a bullish leaning among option analysts.
While options traders also took both sides on Bear Stearns during its crisis, the bias was more clearly on the bearish put side. “We think Lehman is better off than Bear Stearns in a number of respects,” said Scott Sprinzen, credit analyst at Standard & Poor’s. “Their liquidity is stronger, just given the size of their cash position, and (there is) a lesser dependence on credit-sensitive short-term borrowings.”
Reacting to the liquidity scare on Friday, March 14, Standard & Poor’s cut its rating on Bear Stearns’s short-term and long-term counterparty debt. The difference between the ratings agency’s tone on Bear and that on Lehman is hard to miss:
“Ongoing pressure and anxiety in the markets resulted in significant cash outflows toward the week’s end, leaving Bear with a significantly deteriorated liquidity position at end of business on Thursday,” the agency wrote.
Lehman’s prime-brokerage business is smaller than Bear’s relative to its more diverse portfolio, Mr. Sprinzen noted. And Lehman doesn’t depend on hedge-fund clients’ free credit balances to the same extent. In Bear’s case, the “run on the bank” by prime-brokerage clients was a major contributor to its fall.
On the market for credit default swaps, the spreads on Lehman are not far from those on Bear Stearns when it closed Friday March 14. They have since narrowed from their worst levels of the day of 775 basis points to 745 basis points almost twice as wide as where they were Tuesday, according to Phoenix Partners Group. Still, the swaps have not yet started to trade “up front,” indicating traders would want cash on delivery, as happened with the Bear Stearns.

Posted by on September 12th, 2008 at 10:05 am


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