Monday, April 07, 2008

Lehman's Structural Issues

Tuesday's WSJ covering Lehman's $4B preferred stock placement.

The Wall Street Journal carried an article last Tuesday describing Lehman Brothers' recapitalization with $3B of preferred equity. Scared by Bear Stearns' collapse after a run by counterparties and customers, Lehman elected to shore up its capital and cut its leverage.

Perhaps Lehman isn't Bear Stearns. Perhaps it's a bit more diversified and- now- more conservatively funded.

But that's not the entire question, is it? That is, we don't really need to know about just the necessity of Lehman's funding. Sufficiency is the real issue.

Is it possible that only one, perhaps two investment banks- Goldman Sachs and Merrill Lynch- are now sufficiently diversely funded and large to avoid the ultimate negative consequence of their leverage- insolvency?

Maybe Lehman, for all its efforts, just still isn't sufficiently diverse, large, and long term funded. Maybe Morgan Stanley isn't, either.

Oh, yes. Lehman had the Fed window now, as does Morgan Stanley. Then why the new preferred issue?

Well, later last week, Fed Chairman Ben Bernanke did confirm that the window for investment banks is an emergency step. It will be closed when Ben and his colleagues judge the emergency to have passed.

You have to wonder if this is about to be an opportune time for Dick Fuld, Lehman's hardnosed CEO, to exit via a sale of his firm to a commercial bank.

Once Fed funding is off-limits again, what will Lehman's stock price do? For how long will investors really believe that an investment bank is safe, now that SEC Chairman Chris Cox noted that Bear Stearns lost slightly less than 90% of its liquid assets in one day last month?

Lehman still has significant exposure to mortgage loans. And Bear's experience demonstrates how quickly the loans from commercial banks, on which all brokers/investment banks depend, can be pulled.

Per my recent posts in the wake of the Fed's window opening to investment banks, I just don't see, long term, why any but perhaps the very best one or two investment banks can remain independent.

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