The short-financial trade is tired, but maybe not dead yet. Today's Financial Times reports that Lehman Brothers (NYSE: LEH) is trying to sell pieces of itself to foreign investors before having to report another US$3 billion loss in early September.
Lehman Brothers has already reported nearly US$12 billion in losses since the onset of the credit nightmare. Its stock has fallen by 85%. And the FT reports that talks to sell 50% of itself to the Korea Development Bank and China's Citic Securities fell through because both bidders said Lehman's asking price was far too high, given the distressed state of its assets.
You get the feeling Lehman Brothers is like a man so desperate for cash that he'll sell certain vital bodily organs for cash. The commercial real estate portfolio is valued at US$40 billion. The wealth asset management group, US$10 billion.
The trouble is there aren't many organs a man can really do without. You can part with a kidney and maybe some bone marrow, or other bodily fluids. But try to donate your brain, your heart, or your lungs and you'll soon be a corpse, where the sum of the parts are worth more than the whole. Once people realise that, Wall Street is going to look a lot like this.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Coffee Addict on 25 August 2008:
I have had Lehman "on watch" for the past 18 months. Dan is correct to indicate that the sum of the parts (for banks such as Lehman) are very significantly less than the whole.
Selling off many of the parts will keep these parts alive and provide temporary liquidity for the core. Lehman's managers always tout liquidity as a key goal. However liquidity is not the same as underlying profitability. Liquidity can only be applied to debt interest for so long - eventually an over geared, unprofitable enterprise will be bought out or go bust.
Will Lehman find a buyer other than the Fed? I don’t think so. Buyers are interested only in the bits that are now being sold off. The Fed could find itself funding the purchase of a decayed, debt laden skeleton and a brand name for a hundred billion (or so) ever declining dollars.
What is the likely timing of all of this? My best guess is that D-Day for Lehman will happen in 12 months. The investment grade commercial paper market is not yet bad enough to bring Lehman down. Lehman has also invested heavily in the equity tranches of structured products. .
Commercial default rates are still pretty low (around 1.5% - 2.5% (depending on quality)). Lehman may just survive if commercial paper defaults don’t double or quadruple (again) in the next 12 months. The future is anyone’s’ guess, I'm not hopeful, but there is a chance that the L curve will remain flat on its current plateaux.
Any further thoughts from the Old Hat Factory or elsewhere?
Comment by Coffee Addict on 15 September 2008:
My predicted timing for Lehman's demise was optimistic. I don't have a crystal ball which is good enough to indicate exactly when a bank run will start so I shouldn’t have guessed. I am surprised that no other comments were posted.
Comment by testuserhere on 16 September 2008:
lehmann is dead... rip
if these banks were contributing as much to the economy as they think were, i doubt they would have gone under so fast. i dont understand why everyone thinks a particular bank adds such a lot of value to the economy that it cant fold... buckle under... go kaputtski... other banks can and will be created in response to market needs... why do we need to prop these monsters up?
the problem seems to be in managing counterparty risk... what happens when you have bought an instrument from a bank and the bank no longer exists... once we quantify the risk involved we have won half the battle... no one seems to be interested in doing the same, definitely not the bankers
...
the events of the last 12 months in the banking industry have been hilarious to observe... had a lot of good laughs on this... for a bunch of people who think they are so smart, most seem to be pretty dumb...