Wednesday, 21 May 2008 01:00

Lehman has already spent all of the "confidence" money it just raised

Lehman Brothers raised $4 billion dollars to allegedly "prove" to the market that it was liquid and had confident investors and trading partners. I didn't believe that to be the real reason then and I really didn't believe it now. The news is out that the Fed has probably hit a floor in dropping rates, with inflation and unemployment concerns rising. As I stated in my earlier articles on the banking industry , this spells trouble for banks relying on expanding net interest margins to bail them out of their insolvency situations. I knew this was bound to happend, for effective (headline) inflation is out of control and we are bordering negative rates as it is. So as a result, those banks facing the potential of insolvency are now that much worse off. This is a big deal for the investment and commercial banks - a very big deal. My next few posts will concentrate on this, and I will wind them up with a few more of my personal shorts in the sector. Now, back to Lehman...

Lehman raised $4 billion dollars about a month ago. That is the credit. Now let's add up the debits:

  • They had to buy out two investment funds that they ran, engulfed in losses, for $1.8 billion.
  • They are rumored to have losses on their portfolio and their hedges, to the tune of about $1.5 billion to $2 billion .
  • They are firing about 5% of their workforce which will demand severance packages, let's say conservatively about $100 million.
  • They issued a smoke and mirrors earnings report last quarter which hid the fact that they took a cash loss. This means that the IB broken business model is probably taking effect already at this institution.

Now, if we have 4 in inflows, subtract 1.8, less 1.7, less .1, we get $3.6 billion in outflow. I am assuming Lehman didn't net the full $4 billion that was stated as the gross offering amount. So, roundabout, net-net, Lehman is pretty much back where they started from when the market was driving their stock down to $20. I am obviously not the only one who has this funny calculator since Lehman dropped 6.5% today. Let's not forget the Street's Riskiest Bank, which also fell $1.92 today. The Breaking of the Bear was not the only article that had the ability to appear highly prescient against the backdrop of the risky macro scene for banks: Banks, Brokers, & Bullsh1+ part 1and Banks, Brokers, & Bullsh1+ part 2.

My next post will outline some of what I believe to be the riskiest commercial banks and thrifts in the country, at least the ones whose share prices are still high enough to attract my attention.

Last modified on Wednesday, 21 May 2008 01:00


  • Comment Link Reggie Middleton Saturday, 24 May 2008 08:10 posted by Reggie Middleton

    I can talk objectively on this. If I had a prime account with Lehman, I just don't think it would be worth the risk to stay there. I am not the only one who thinks this way, either. As a small entrepreneurial investor, I just can't afford to have my funds locked up in a liquidation - particularly not in a market as volatile as this.

  • Comment Link Chief Debt Officer Thursday, 22 May 2008 23:57 posted by Chief Debt Officer

    According to Bloomberg, Lehman sold $2 billion of 30-year 7.5 percent bonds on May 1st, so the situation is not so bad as you wrote, I guess.

  • Comment Link Ry Mill Wednesday, 21 May 2008 22:36 posted by Ry Mill

    Another great article Reggie! I continue to be content on holding onto my Lehman shorts (along with other banks and builders).

    Thanks for your insight! I make sure I visit your site several times per day!


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