Lehman News (NYSE: LEH), Today's Pariah
By The Greek:
Even though it was as hard to miss as a freight train roaring down the tracks, we followed up our Fannie and Freddie forecast by calling the latest debacle, the Lehman unwind, which we noted in our last week ahead edition.
To be precise, "The Greek" wrote, "We've now saved (loosely defined of course) Bear Stearns (NYSE: JPM), MBIA (NYSE: MBI), Ambak Financial (NYSE: ABK) and the GSEs. So, who's next? Lehman Brothers (NYSE: LEH) looks desperate for capital; I'm looking eastward into Europe and Japan after that."
The reality is that we've efforted (our gov't did) to save the broader financial system and economy at the cost of equity holders in those above listed firms. Don't worry, we'll build a memorial for them on Pearl Street and serve beer. It'll be a big hit, because Goldman is close by. In some cases, I might label some of the so-called bail out actions near criminal, if it weren't the government committing the saving that is. In the case of Bear, our initial judgment has been reinforced and highlighted by SEC investigation, and that viewpoint was that speculative trading and rumor mongering played a great role in undoing a great firm.
Tuesday, when the Korean Development Bank deal (read last hope) fell apart, it became clear Lehman would attract that same unwanted attention. Lehman's shares promptly nose-dived, falling 45% on Tuesday. After Wednesday's premature financial reporting, schemed up to stave off torch toting peasants, which by the way was exactly what Bear needed to do on that Friday before the now infamous Monday that it never greeted, Lehman managed to stop the bleeding. LEH shares were actually up slightly on the open and managed to hold on to shaky footing through the morning. By the end of the day though, LEH shares had given back another 7%, and even more ground was lost after hours. Each minute that passes seems to erode value in LEH shares, and we dare not look now. The six letter word we are looking for to complete the crossword puzzle is "pariah."
Lehman's News
Lehman's press release on Wednesday morning reeked of desperation; and I quote (not really):
Comprehensive Set of Actions to Significantly Reduce Commercial Real Estate, Residential Mortgage and All Other Things You Investors Are Scared of and Relate to Danger
Oh, and We're Also Hopeful to Sell a Big Piece of Our Only Valuable Asset, Our Stake in the Investment Management Business, Cause We Need the Money to Insure We have Jobs to Come Back to Tomorrow and So We Can Keep Our Vacation Homes in Antigua. Thanks and Good Morning.
Then they listed twenty intimidating pages of content. Much of the release contained details about the quarter though; the restructuring itself was to the point, but with a tint of spin, as all such copy typically is. And about ten minutes after the release, we expect the Oil Industry analyst was probably published on the wire and appearing in front of financial media cameras saying, "Look OPEC is Bad, OPEC Evil! Pay attention to OPEC news." (OPEC cut oil production the same day)
If you spent some time looking through the press release, you probably sold Korean Development Bank short, cause what the heck were they thinking! In short, Lehman posted a whole lot of ugly numbers in our view, and then told us how much better those figures were from last quarter's. To draw a timely analogy, that might be like the New England Patriots saying, "At least Brady is not out for two years."
So, you can't really blame sentiment or rogue traders for doing you in when you're still bleeding mortgage-related asset write-downs the size of $5.6 billion after hedges. Heck, Goldman's (NYSE: GS) hedges were working better than that two quarters ago. Even so, Lehman's hedges and debt valuation gains saved them $2.2 billion. DO YOU KNOW WHAT I COULD DO WITH TWO BILLION DOLLARS? Actually, it wouldn't be all that sexy at all really. I might start by NOT buying Lehman Brothers. And I guess I would join a potato of the month club.
No, Seriously, the Details!
The press release notes significant reduction of exposure to residential mortgages, commercial real estate and high yield acquisition finance, but we have to wonder if that exposure reduction is the result of smart sales or rather write-offs... In the case of residential real estate, it might be a lot of the latter and a little of the former.
The write-offs you know about. Here's the new stuff: The company is about to sell $4 billion in U.K. residential mortgages, and unfortunately, to save its stock, it had to publicize this. No doubt, all this publicity is aiding the buyer of these assets to get a better price, but too bad for longs, LEH is the seller. Even so, the U.K. real estate market is falling apart along with the U.S., so maybe LEH will still manage to make a few bucks more than it would have lost in the future, assuming that would happen.
If You Can't Sell it Spin it!
Lehman is spinning off its commercial real estate assets to shareholders. I also heard that the best way to stop gangrene is amputation... That said, this appears to be a smart move. Spinning off these assets clearly seems to add value for shareholders, and it's a case where the sum of the parts looks to be more than the whole. Why so?
These assets, spun off to LEH shareholders in a separate organization to be known as Real Estate Investments Global (glad to see LEH isn't blowing money on wasteful branding here - actually, this name is web powerful and valuable, but unfortunately it looks like Lehman already owns the site (but what about this one)). Anyway, breaking up these assets will apparently allow the new company to account for its commercial real estate interests on a mark-to-maturity basis, saving investors from those nasty mark-to-market write-offs we've come to know so well. Of course, "saving" depends on if "maturity" means the assets will be worth anything or not at that time. Anyway, Lehman believes the company will be able to capitalize to do this, and they can wait out value. At first glance, looks to me like there might be some value to this nascent firm, but we would have to take a closer inspection of the actual assets (Mr. Douville, what say ye?).
And Spin it Again Sam!
Lehman is auctioning off a majority interest in its Investment Management Division. It seems that because the company's equity valuation has been penalized so much for leverage and risk, this sale is expected to raise tangible book. Capital gained from the auction of the interest, which has value and a reputation, is cash after all, and you can't penalize cash for being part of Lehman can you... Cash is cash, whether its in the pocket of today's infected of Wall Street or in Warren Buffet's golden pocket - it's still cash.
Now, if this part doesn't sound like spin, I don't know what does - Lehman will retain a majority of the pretax earnings of the division, despite selling a majority stake in the business. Sweet, you must be thinking. How do you do that? Well, you keep the higher paying assets in house; these also happen to be the hardest to sell and for good reason. Unfortunately, those are also the riskiest of cash flow producers, i.e. Lehman's minority interests in external hedge funds. So, while they've earned better historical returns, who's to say what happens in this current environment.
Still, I think that even if Lehman is not creating value by doing this, it's at least preserving it. The question is, "are they getting value from the sale or not?" Lehman is creating value by separating an asset from the sick parent. This should help the subject subset portfolios that are being sold to retain clients and related assets that might otherwise have flown the coop. Also, because of the change, the company will be able to eliminate goodwill related to its Neuberger Berman business, and its Tier 1 capital ratio will improve. Also, $3 billion in tangible book will be created. Do you know what I could do with $3 billion? Yep, more potatoes.
Finally, Lehman is cutting its dividend to help pay the bills, a necessary cash flow management maneuver. I joked earlier, but clearly staying solvent is as important to equity holders as it is to managers. They keep their paychecks, and you have a chance to live another day and participate in market recovery when that day dawns. There's a flaw in that argument though you see.
When Communism Pays
As an investor in a liquid asset, you are free to sell Lehman today and buy JP Morgan (NYSE: JPM), Morgan Stanley (NYSE: MS) or Goldman Sachs (NYSE: GS) tomorrow. And, judging by the stock price activity, many of you have... The point is that you do not necessarily have to sell the best assets of the firm to get the best return. I like this idea, however, when the asset is really an unrelated business to the core operations of the company.
Keeping the firm alive is most important to the largest investors whose interest is inherently less liquid, especially since KDB dropped out of the bidding. And, it is in fact the goal of the whole, as a group, if you can view shareholder ownership as a communist state - perhaps you all benefit if you can act as a group. However, shareholders live under a sort of prisoner's dilemma. Will the other guy squeal on you, and hope you don't squeal on him? You both end up squealing, sell the stock and both go to capital loss prison as a result. But if you all held on, nobody sold, you both go free and your stock's P/E and P/B value inflate against those of peers; this happens of course because your price stays unnaturally high. So here's a case where communism could make you more money than capitalism, unless you short, which we know now is actually communist controlled by the SEC anyway! Relax, I'm joking!
Better hedges might be of aid here. What about trading a stake in the investment management business for a stake in a debt mitigation firm; in doing so, you might support both ends of the hedge. Your losses will be partly offset by gains in the growing collections business (I'm not even joking), and you live to see another day, at which point you sell the collection agency etc. Throw me a bone here, I'm just thinking out loud. Desperate times call for desperate measures...
Seriously, How Do You Stay Afloat if You're Lehman?
First and foremost, you have to quell counterparty concern, though now you have the Fed as counterparty of last resort. Equally important, you have to calm your funders, the equity market and your shareholder base. Lehman tried to do that with its report and actions on Wednesday, and the message they transcended through the conference call as well.
This is how you judge your managers; this is where they make or break you. If they successfully stop the bleeding, these guys are worth the big bucks and outrageous bonuses, but if they're Bear Stearns all over again, then no. When all your capital is at stake, you want a coach who can rally the troops at the helm. Judging by the situation, Lehman looks to have acted too late in the game and cost its shareholders as a result. So, you can't blame the media or short-sellers for making you the latest pariah on Wall Street. Managers with foresight should have seen this coming and acted before fire sale prices became the best option.
Please see our disclosure at the Wall Street Greek website. Article interests AMEX: DIA, AMEX: SDS, AMEX: SPY, AMEX: DOG, AMEX: QLD, Nasdaq: QQQQ, NYSE: NYX.
Even though it was as hard to miss as a freight train roaring down the tracks, we followed up our Fannie and Freddie forecast by calling the latest debacle, the Lehman unwind, which we noted in our last week ahead edition.
To be precise, "The Greek" wrote, "We've now saved (loosely defined of course) Bear Stearns (NYSE: JPM), MBIA (NYSE: MBI), Ambak Financial (NYSE: ABK) and the GSEs. So, who's next? Lehman Brothers (NYSE: LEH) looks desperate for capital; I'm looking eastward into Europe and Japan after that."
The reality is that we've efforted (our gov't did) to save the broader financial system and economy at the cost of equity holders in those above listed firms. Don't worry, we'll build a memorial for them on Pearl Street and serve beer. It'll be a big hit, because Goldman is close by. In some cases, I might label some of the so-called bail out actions near criminal, if it weren't the government committing the saving that is. In the case of Bear, our initial judgment has been reinforced and highlighted by SEC investigation, and that viewpoint was that speculative trading and rumor mongering played a great role in undoing a great firm.
Tuesday, when the Korean Development Bank deal (read last hope) fell apart, it became clear Lehman would attract that same unwanted attention. Lehman's shares promptly nose-dived, falling 45% on Tuesday. After Wednesday's premature financial reporting, schemed up to stave off torch toting peasants, which by the way was exactly what Bear needed to do on that Friday before the now infamous Monday that it never greeted, Lehman managed to stop the bleeding. LEH shares were actually up slightly on the open and managed to hold on to shaky footing through the morning. By the end of the day though, LEH shares had given back another 7%, and even more ground was lost after hours. Each minute that passes seems to erode value in LEH shares, and we dare not look now. The six letter word we are looking for to complete the crossword puzzle is "pariah."
Lehman's News
Lehman's press release on Wednesday morning reeked of desperation; and I quote (not really):
Comprehensive Set of Actions to Significantly Reduce Commercial Real Estate, Residential Mortgage and All Other Things You Investors Are Scared of and Relate to Danger
Oh, and We're Also Hopeful to Sell a Big Piece of Our Only Valuable Asset, Our Stake in the Investment Management Business, Cause We Need the Money to Insure We have Jobs to Come Back to Tomorrow and So We Can Keep Our Vacation Homes in Antigua. Thanks and Good Morning.
Then they listed twenty intimidating pages of content. Much of the release contained details about the quarter though; the restructuring itself was to the point, but with a tint of spin, as all such copy typically is. And about ten minutes after the release, we expect the Oil Industry analyst was probably published on the wire and appearing in front of financial media cameras saying, "Look OPEC is Bad, OPEC Evil! Pay attention to OPEC news." (OPEC cut oil production the same day)
If you spent some time looking through the press release, you probably sold Korean Development Bank short, cause what the heck were they thinking! In short, Lehman posted a whole lot of ugly numbers in our view, and then told us how much better those figures were from last quarter's. To draw a timely analogy, that might be like the New England Patriots saying, "At least Brady is not out for two years."
So, you can't really blame sentiment or rogue traders for doing you in when you're still bleeding mortgage-related asset write-downs the size of $5.6 billion after hedges. Heck, Goldman's (NYSE: GS) hedges were working better than that two quarters ago. Even so, Lehman's hedges and debt valuation gains saved them $2.2 billion. DO YOU KNOW WHAT I COULD DO WITH TWO BILLION DOLLARS? Actually, it wouldn't be all that sexy at all really. I might start by NOT buying Lehman Brothers. And I guess I would join a potato of the month club.
No, Seriously, the Details!
The press release notes significant reduction of exposure to residential mortgages, commercial real estate and high yield acquisition finance, but we have to wonder if that exposure reduction is the result of smart sales or rather write-offs... In the case of residential real estate, it might be a lot of the latter and a little of the former.
The write-offs you know about. Here's the new stuff: The company is about to sell $4 billion in U.K. residential mortgages, and unfortunately, to save its stock, it had to publicize this. No doubt, all this publicity is aiding the buyer of these assets to get a better price, but too bad for longs, LEH is the seller. Even so, the U.K. real estate market is falling apart along with the U.S., so maybe LEH will still manage to make a few bucks more than it would have lost in the future, assuming that would happen.
If You Can't Sell it Spin it!
Lehman is spinning off its commercial real estate assets to shareholders. I also heard that the best way to stop gangrene is amputation... That said, this appears to be a smart move. Spinning off these assets clearly seems to add value for shareholders, and it's a case where the sum of the parts looks to be more than the whole. Why so?
These assets, spun off to LEH shareholders in a separate organization to be known as Real Estate Investments Global (glad to see LEH isn't blowing money on wasteful branding here - actually, this name is web powerful and valuable, but unfortunately it looks like Lehman already owns the site (but what about this one)). Anyway, breaking up these assets will apparently allow the new company to account for its commercial real estate interests on a mark-to-maturity basis, saving investors from those nasty mark-to-market write-offs we've come to know so well. Of course, "saving" depends on if "maturity" means the assets will be worth anything or not at that time. Anyway, Lehman believes the company will be able to capitalize to do this, and they can wait out value. At first glance, looks to me like there might be some value to this nascent firm, but we would have to take a closer inspection of the actual assets (Mr. Douville, what say ye?).
And Spin it Again Sam!
Lehman is auctioning off a majority interest in its Investment Management Division. It seems that because the company's equity valuation has been penalized so much for leverage and risk, this sale is expected to raise tangible book. Capital gained from the auction of the interest, which has value and a reputation, is cash after all, and you can't penalize cash for being part of Lehman can you... Cash is cash, whether its in the pocket of today's infected of Wall Street or in Warren Buffet's golden pocket - it's still cash.
Now, if this part doesn't sound like spin, I don't know what does - Lehman will retain a majority of the pretax earnings of the division, despite selling a majority stake in the business. Sweet, you must be thinking. How do you do that? Well, you keep the higher paying assets in house; these also happen to be the hardest to sell and for good reason. Unfortunately, those are also the riskiest of cash flow producers, i.e. Lehman's minority interests in external hedge funds. So, while they've earned better historical returns, who's to say what happens in this current environment.
Still, I think that even if Lehman is not creating value by doing this, it's at least preserving it. The question is, "are they getting value from the sale or not?" Lehman is creating value by separating an asset from the sick parent. This should help the subject subset portfolios that are being sold to retain clients and related assets that might otherwise have flown the coop. Also, because of the change, the company will be able to eliminate goodwill related to its Neuberger Berman business, and its Tier 1 capital ratio will improve. Also, $3 billion in tangible book will be created. Do you know what I could do with $3 billion? Yep, more potatoes.
Finally, Lehman is cutting its dividend to help pay the bills, a necessary cash flow management maneuver. I joked earlier, but clearly staying solvent is as important to equity holders as it is to managers. They keep their paychecks, and you have a chance to live another day and participate in market recovery when that day dawns. There's a flaw in that argument though you see.
When Communism Pays
As an investor in a liquid asset, you are free to sell Lehman today and buy JP Morgan (NYSE: JPM), Morgan Stanley (NYSE: MS) or Goldman Sachs (NYSE: GS) tomorrow. And, judging by the stock price activity, many of you have... The point is that you do not necessarily have to sell the best assets of the firm to get the best return. I like this idea, however, when the asset is really an unrelated business to the core operations of the company.
Keeping the firm alive is most important to the largest investors whose interest is inherently less liquid, especially since KDB dropped out of the bidding. And, it is in fact the goal of the whole, as a group, if you can view shareholder ownership as a communist state - perhaps you all benefit if you can act as a group. However, shareholders live under a sort of prisoner's dilemma. Will the other guy squeal on you, and hope you don't squeal on him? You both end up squealing, sell the stock and both go to capital loss prison as a result. But if you all held on, nobody sold, you both go free and your stock's P/E and P/B value inflate against those of peers; this happens of course because your price stays unnaturally high. So here's a case where communism could make you more money than capitalism, unless you short, which we know now is actually communist controlled by the SEC anyway! Relax, I'm joking!
Better hedges might be of aid here. What about trading a stake in the investment management business for a stake in a debt mitigation firm; in doing so, you might support both ends of the hedge. Your losses will be partly offset by gains in the growing collections business (I'm not even joking), and you live to see another day, at which point you sell the collection agency etc. Throw me a bone here, I'm just thinking out loud. Desperate times call for desperate measures...
Seriously, How Do You Stay Afloat if You're Lehman?
First and foremost, you have to quell counterparty concern, though now you have the Fed as counterparty of last resort. Equally important, you have to calm your funders, the equity market and your shareholder base. Lehman tried to do that with its report and actions on Wednesday, and the message they transcended through the conference call as well.
This is how you judge your managers; this is where they make or break you. If they successfully stop the bleeding, these guys are worth the big bucks and outrageous bonuses, but if they're Bear Stearns all over again, then no. When all your capital is at stake, you want a coach who can rally the troops at the helm. Judging by the situation, Lehman looks to have acted too late in the game and cost its shareholders as a result. So, you can't blame the media or short-sellers for making you the latest pariah on Wall Street. Managers with foresight should have seen this coming and acted before fire sale prices became the best option.
Please see our disclosure at the Wall Street Greek website. Article interests AMEX: DIA, AMEX: SDS, AMEX: SPY, AMEX: DOG, AMEX: QLD, Nasdaq: QQQQ, NYSE: NYX.
posted by The Greek | 12:00 PM
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