bank run blog

Lehman Brothers Holdings entered the weekend on the verge of collapse, and many analysts were expecting the announcement of some sort of sale before the markets opened. That hasn’t happened, and consequently the investment bank is now facing a potentially disastrous week.

In the meantime, a trio of articles from the British press highlight different aspects of the drama unfolding behind the scenes at Lehman. The Independent reports Lehman chief in race against time :

“Lehman Brothers chief executive, Dick Fuld, is in a race against time to rebuild the investment bank’s battered balance sheet and set out a reason for the company to remain independent amid growing calls for new leadership or a sale of the company.

Mr Fuld, the longest-serving chief executive of an independent Wall Street bank, will this week redouble his efforts to find buyers for major assets, as Lehman prepares to close the books on another quarter of multibillion-dollar losses.”

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Fuld won’t make it through the current crisis, according to the Observer, which reports Lehman chief faces internal coup :

“Richard Fuld’s days as Lehman Brothers chief are numbered as a plan is being hatched within the troubled Wall Street investment bank to strip him of his executive duties.

The planned coup comes amid rumours a Korean investor is planning either a sizeable investment in Lehmans or an outright acquisition of the firm.”

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The Times has an interesting piece on a company bailout for its own senior executives, Lehman Brothers payout for top staff :

“Lehman Brothers is working on plans to compensate senior executives for the huge loss of value in their share options, alongside plans to raise capital.”

The move is seen as necessary to retain key staff :

“Alongside plans to shore up the balance sheet, Lehman executives are said to be planning a morale-boosting exercise to prevent a potential exodus of its senior staff.

Following the 85% collapse in the firm’s share price, lucrative share options awarded to executives and bankers have been all but wiped out.

‘There has been talk at a senior level about finding some form of compensation for the loss of value in the share options,’ said a source.”

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The shocking discovery by Wall Street and Washington that government-backed mortgage repackagers Fannie Mae and Freddie Mac are insolvent and must be bailed out soaked up most of the media’s attention bandwidth today, but another major story continues to unfold as Lehman Brothers careens towards collapse. The Guardian ran this report from Reuters :

“Shares of Lehman Brothers plunged to nine-year lows and stock in other Wall Street firms declined as new signs of distress in financial markets spooked investors.

Lehman fell as much as 23 percent, before recovering to be down more than 15 percent late Friday afternoon, far outpacing the drop in rivals such as Merrill Lynch & Co, which lost 5.33 percent and Goldman Sachs Group Inc, which declined 5.15 percent. Morgan Stanley fell 1.4 percent.

In the last two weeks, Lehman has lost about a third of its market value, and the company’s shares now trade at less than half their book value, or the net accounting value of its assets, which typically signals extreme distress.”

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Some media outlets are giving credence to the company’s protestations that they are the target of mailicious rumors circulated by short sellers. The New York Times helped Lehman spread the anti-rumor :

“Like Bear before it, Lehman has been battered by an almost daily dose of market rumors. Thursday’s batch included speculation that Pimco, the giant California-based bond fund, and SAC Capital, a large hedge fund, had stopped doing business with Lehman. Representatives for both Pimco and SAC said the rumors were not true and that they continued to do business with Lehman.

‘The shorts are going after anyone who is levered and doesn’t have an exit plan,’ said one senior trader who is not authorized to speak for his institution.”

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An article in the Wall Street Journal tacitly recognizes that the investment bank will eventually be taken over by another major financial institution :

“Lehman Chief Executive Richard Fuld Jr. has expressed little interest in selling the investment bank he has led as CEO since 1993. It isn’t clear how actively Lehman is considering potential deals with strategic investors or raising additional capital. Lehman raised $6 billion in new capital last month, but the capital-raising environment is becoming increasingly difficult, partly because of how much cash Wall Street firms have pulled in already.”

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One day after his performance in an unprecedented earnings call on Monday morning, the future is looking more uncertain than ever for Lehman Bros. CEO Richard Fuld. According to an article on Yahoo Finance :

“On Monday, the talk was how Lehman Brothers had stemmed the bleeding by announcing a loss that wasn’t worse than expected and reducing its mortgage exposure. Meanwhile, CEO Dick Fuld received high marks for taking the heat and admitting responsibility for the mess.”

The article notes that, notwithstanding Fuld’s performance, his company’s shares failed to rise to the occasion :

“But Lehman shares never made it back to $28 — the level from where the company did its $6 billion dilution last week. Today, the stock is tumbling anew Tuesday after several analysts question whether more write-downs are coming from Lehman, which is something Fuld may not be able to survive.”

Analysts have rightly questioned some of the assumptions baked into Fuld’s blueprint for growth, after having been burned repeatedly since last August by the confident public statements of financial sector executives. The New York Times covered the Lehman earnings call :

“But Mr. Fuld faced tough questions from analysts Monday about Lehman’s earnings power. Analysts expressed skepticism that Lehman could achieve a return on equity of about 15 percent, as the investment bank suggested it could. And they questioned the way Lehman values assets that are hard to value, like mortgage investments and private equity stakes in companies.

‘The general question is: have you taken sufficient write-downs?’ asked Michael Mayo, an analyst with Deutsche Bank. ‘The reason I ask is there are cases of other top management officials at other companies saying they were finished and then other quarters, they had big write-downs again.’”

Yahoo Finance : Lehman’s Fuld Buys Time, But the Bleeding Continues

New York Times : At Lehman, a Reminder of Loss

Lehman Bros. Holdings has announced the removal of its Chief Financial Officer and its Chief Operating Officer, in another step designed to reassure investors that the investment bank is serious about addressing its balance sheet difficulties. The Associated Press reports :

“The hope at Lehman Brothers is that a management shakeup Thursday will contain the damage of a stunning quarterly loss — yet some on Wall Street fear this is one more step toward a more dramatic outcome for the embattled investment bank.

The ouster of Chief Financial Officer Erin Callan and Chief Operating Officer Joseph Gregory was an attempt to quell investor anger that Lehman’s leadership has failed them. But, with a four-day stock plunge that wiped $4.5 billion from the investment bank’s market value, it was unclear if the upheaval will be enough to satisfy critics.”

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A piece in the Times refers to Wall Street talk of insolvency at Lehman :

“Lehman Brothers shares have fallen by about 60 per cent this year as the company has been dogged by persistent rumours that it is on the brink of collapse. The group has repeatedly denied that it is short of cash.”

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With the financial sector nosediving on Wall Street, attention has once again focused on Lehman Bros. Holdings, the smallest investment bank left after the failure of Bear Stearns in March. The International Herald Tribune reports :

“Lehman Brothers is doing business as usual with most of its derivatives trading clients, but at least a couple have scaled back their operations as the bank prepares to post its first loss since becoming a public company 14 years ago, in a sign of the challenges being faced by the investment firm.”

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An article in the New York Times speculates that eventually all four of the remaining major investment banks will merge with commercial banks, in a development that many economists have been predicting since the credit collapse went public in August 2007 :

“More broadly, some analysts and investors are speculating that stand-alone investment banks in the United States — like Lehman — will need to pair up with commercial banks to lock in to a stable source of funds.

That, according to Reuters, should help them deal with future shocks and to sustain growth even if regulators restrict leverage.

And once the credit crisis begins to ease, the news service suggested, battered brokerage houses are likely to make for attractive pickings for commercial banks looking to expand into investment banking, setting the stage for consolidation in the industry.”

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That Lehman Bros. might be particularly vulnerable was the subject of a report by Barron’s citing rumors that, despite its public statements, the investment bank is having difficulty raising new capital :

“Shares of Lehman Brothers have tumbled 7% in Wednesday’s trading amid worries that recessionary forces have gripped the economy and that - more pointedly - Lehman’s intimations that it has righted its balance sheet might be more fatuous than the bank has let on. Shares of the stock have fallen 26% just since Thursday of last week, an even more-dramatic four-day slide than the string of losses the stock sustained as the calendar turned from May to June.”

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Persistent rumors about the solvency of the country’s fourth largest investment bank have started to make it into the mainstream business media. The Associated Press is reporting :

“Lehman Brothers Holdings Inc. on Monday said it will raise $6 billion in new capital to shore up its balance sheet after saying it expects to post an unexpectedly large second-quarter loss of nearly $3 billion.

Shares of the nation’s fourth-largest investment bank fell more than 9 percent amid mounting concerns about its exposure to the mortgage market. Analysts were quick to react to Lehman’s announcement, with credit rating agency Moody’s Investors Service lowering its outlook on the firm.”

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A report by BBC News notes that just like Bear Stearns before it, Lehman has been busy assuring investors that everything is OK :

“Just last week the bank denied it was facing funding problems.

It is the first loss for the Wall Street bank since being spun off from American Express in 1994.

The move comes after Lehman Brothers raised $4bn in April by selling shares to quell investor concerns that it needed more capital.”

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Bloomberg is openly wondering if the bank will last the year as it unloads assets :

“Now, as Lehman reports a $2.8 billion loss — its first since the company’s spinoff from American Express Co. in 1994 — Fuld is doing everything he can to ensure that the fourth-largest securities firm survives another year if not the next 10. Trouble is he’s discarding some of the elements that enabled New York- based Lehman to report faster earnings growth from 2002 to 2007 than any of his competitors except Goldman Sachs Group Inc.

Lehman disclosed the second-quarter loss today and simultaneously raised $6 billion by selling shares to the public. To reduce market risks, the company said it unloaded about $130 billion of holdings during the quarter, whittling down assets tied to mortgages and leveraged-buyout loans by as much as 35 percent.”

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MarketWatch reported this afternoon that renewed speculation about the solvency of investment bank Lehman Bros. pummeled its shares despite protestations from company spokesmen that an institutional run similar to the one that took down Bear Stearns is not imminent :

“Shares of Lehman Bros. Holdings fell sharply Thursday as anxiety about its financial position troubled investors, but the company said it as in good shape and blamed short sellers for the fears.”

The story also included a new warning about Merrill Lynch :

“Meredith Whitney, an analyst at Oppenheimer & Co., reckons that Merrill will announce $6 billion in write-downs. Her previous estimate was $2 billion. She is now predicting a first-quarter loss of $3 a share vs. a prior estimate of a 45 cents a share profit.”

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An unusual volume of puts on Lehman in early trading was the first sign of new trouble for the firm’s stock, which has already seen substantial losses in the first quarter, according to Bloomberg :

“Lehman Brothers Holdings Inc. shares fell the most in a week after options traders speculating the bank is facing funding shortages increased bearish bets on the stock. The company said the speculation is unfounded.

Lehman declined 8.9 percent to $38.71 in New York. The shares have lost 41 percent this year amid more than $200 billion of industry wide losses in mortgage-related securities. The number of bearish put options traded on Lehman’s stock exceeded calls by 3-to-1 and put volume in the first three hours of the day topped the daily average of the past 20 sessions.”

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The dramatic events of Friday have given way to an uneasy weekend of speculation about the next phase of the banking crisis. With a full percentage point cut in the Federal funds rate already priced in, investors are starting to look suspiciously at the rest of the big five investment banks : Goldman Sachs, Morgan Stanley, Merrill Lynch, and Lehman Bros. Goldman seems to be in the least worrisome position, with Lehman probably the most exposed. MarketWatch reports :

“The emergency bailout of Bear Stearns Cos. dented confidence in other securities firms ahead of results next week from some of Wall Street’s giants including Goldman Sachs, Morgan Stanley and Lehman Brothers, analysts said on Friday.”

An Associated Press article reprinted in BusinessWeek echoes the doubts about Lehman’s ability to survive the next round :

“But Lehman Brothers Holdings Inc. appears to be an investment bank that investors are very worried about right now — mainly because it is the investment bank that is most similar to Bear in structure and exposure. Its stock dropped more than 14 percent on Friday.”

MarketWatch : Bear bailout sparks concern about other brokers

BusinessWeek : After Bear Stearns, who may be next?

Wall Street Journal : A Liquidity Squeeze Reveals Vulnerability Of a Wall Street Firm

Bloomberg News : S3 Partners Pulled $25 Billion From Bear Stearns, WSJ Says