The Fed’s Suez Crisis
Posted by Eddy Elfenbein on September 15th, 2008 at 3:10 pm

Something that struck me about Lehman’s demise is how little power the Federal Reserve really has. Don’t get me wrong, the Fed is darn powerful, but it’s not all-knowing and all-seeing, despite what some folks think. The Fed is powerful because people think it’s powerful.
Analysts hang on every word in a statement or testimony, but in the case of Lehman Brothers (LEH), the Fed really couldn’t do much. Wall Street basically stood up to the Fed and the central bank was exposed. Since Bear was the first, the Fed can open its mouth and get its way. But the Fed can’t make the weaker argument the stronger, and that’s what was needed with Lehman.
I’d say the Lehman story was a combination of too much debt—at one time they were leverage 40-to-1, they didn’t know what they owned, and they refused to listen to any criticism. To top it off, they had horrible luck too. That’s not a good combination.
With Level 3 assets (these are basically assets that can’t be priced easily so we have to trust Lehman for the price), Lehman once claim they their Level 3 stuff was up 9%, even though the market was down by 10%. When people called them on it, Lehman got mad and blamed the shorts. That’s just arrogance. Then they spent something like $22 billion on Archstone? I mean, what the hell? Talk about the wrong price, the wrong industry at the wrong time. Aside from that, it was a great deal!
Einhirn and other shorts said they didn’t know what their stuff was worth and they were undercapitalized. Fuld & Co. just refused to listen. I don’t think they’re crooks at all, they sincerely believed in what they were doing. Until the end, the company was offering assurance to investors.
With Bear and Lehman we often heard about counterparty risk. Well, that theory got shot down with Lehman. I’m going to go on the idea that the reason there wasn’t a deal for Lehman is that no one wanted one. If someone wanted, it would have happened. Novel thinking I know. But it tells us that the Street is hardly concerned about counterparty risk. JPM was concerned about with Bear because it was mostly their risk.
I heard Hank Paulson talk about bringing stability to the markets. Yeah, right. That’s basically like the flea giving orders to the dog. The Fed and the Treasury do not have this thing contained. If the housing market recovers, then the problem goes away. It’s as simple as that.

Eddy TV
Posted by Eddy Elfenbein on September 15th, 2008 at 2:40 pm

I was just on Britain’s SkyTV discussing Lehman’s implosion. If I can find the video, I’ll post it here.

91-Day Treasuries
Posted by Eddy Elfenbein on September 15th, 2008 at 11:03 am

The yield on the 91-day Treasury basically got chopped in half today. At one point, the yield got down to 0.67%.10-year Treasury futures had their best one-day gain in nearly 20 years. Now if I can only remember what happened in October 1987.

Happy Birthday General Motors!
Posted by Eddy Elfenbein on September 15th, 2008 at 9:17 am

GM turns 100 years old today.
The stock is currently around $13. Unfortunately, their book value per share is about -$100.
Someone alert Hank Paulson.

Yale and Harvard’s Endowments
Posted by Eddy Elfenbein on September 15th, 2008 at 8:32 am

From June 30, 2007 to June 20, 2008, the S&P 500 lost -13.1%. But Harvard and Yale managed to eek out gains for their endowments. Yale hasn’t announced the figure yet, but it’s expected to be positive in the single digits. Harvard gained 8.6%, which is better than 95% of institutional managers, to reach a total of $36.9 billion. Yale’s endowment now stands at $23 billion.

Just a Reminder
Posted by Eddy Elfenbein on September 15th, 2008 at 7:19 am

Erin Callan from Lehman’s conference call in June:

Lowering gross and net leverage to less than 25 times and less than 12.5 times respectively, both of those numbers are prior to today’s capital raise; reducing our gross assets by approximately $130 billion and our net assets by approximately $60 billion with a large part of the reduction, as I will talk about in detail, coming from less liquid asset categories and also providing significant price visibility for marking the remainder of our inventory.
We significantly reduced our exposure to asset classes such as residential and commercial mortgages, and real estate held for sale of approximately 15% to 20% in each case and acquisition and finance exposure by almost 35%. We also reduced our high yield or non-investment grade debt inventory in the aggregate, which includes our funded acquisition finance position by greater than 20% in the quarter.
I want to be clear at this point that we do not intend to lower our leverage ratios from these levels. From a liquidity perspective, we made great progress growing our cash capital surplus to approximately $15 billion, that’s the surplus, from $7 billion in the first quarter. We grew our liquidity pool to almost $45 billion and that compares with $34 billion at the end of the first quarter.

Lehman Fills for Chapter 11
Posted by Eddy Elfenbein on September 15th, 2008 at 6:49 am

It’s official. After 158 years of business, Lehman Brothers (LEH) is no more. The company has filed for Chapter 11. I was glad to see the Fed walk away from saving them. A year ago, LEH was going for about $60 a share. The current bid is for 70 cents a share.
In a very exciting Sunday, Bank of America (BAC) announced that it’s buying Merrill Lynch (MER) for $29 a share. Now Morgan (MS) and Goldman (GS) are the last two independent I-banks standing.
That’s not all. There’s talk of a Fed rate cut today (bad idea). Also, AIG (AIG) is in very big trouble and is scrambling to raise money. Oil is also down over $4 and is now below $97.

Denouement on Wall Street
Posted by Eddy Elfenbein on September 14th, 2008 at 7:08 pm

It’s all falling apart.
Bank of America in Talks to Acquire Merrill Lynch
Lehman Inches Toward Bankruptcy After Potential Buyers Drop Out
The WSJ writes:

In a recent note to clients, Oppenheimer analyst Meredith Whitney pointed out that industry revenue was down 63% in the first half of 2008 from the first half of 2007, but expenses were cut by just 10% during that period. Non-compensation expenses, which include buildings and technology, actually rose 25% from the prior year.

Remember when Sunday wasn’t the most newsworthy day on Wall Street.

Why Lehman Brothers Is Not Bear Stearns
Posted by Eddy Elfenbein on September 12th, 2008 at 10:05 am

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.

Crossing Wall Street Seven Years Ago
Posted by Eddy Elfenbein on September 11th, 2008 at 12:34 am