Lehman's "Franchise" & Good Bank/Bad Bank Structure

The Wall Street Journal carried several articles concerning Lehman yesterday. The two elements of the firm's activities yesterday on which I would like to focus are Fuld's remarks, and the evolving 'good bank/bad bank' structure proposed for the firm.

According to the Journal,

"A subdued-sounding Mr. Fuld acknowledged that "losses created by these concentrated legacy assets have clouded the underlying value of our franchise," distracting clients, trading partners and employees. "While they continue to stand with us, we nevertheless cannot put the strength of our franchise and their continued trust at risk." "

Who is Fuld kidding?

"Legacy assets?"
"Underlying value of our franchise?"

Where does Fuld think his 'legacy assets' came from? Did he go to the men's room for the last five years, came out and suddenly saw them on the firm's balance sheet?

What, specifically, amidst this residue of Lehman's appalling risk management, does Fuld think is the firm's 'franchise?'

Franchise typically refers to some intangible value. In this case, an outgrowth of respect for management skill and/or talent. Where is Lehman's? How do you argue for any skill in a firm which, by virtue of Fuld's ego, expanded way beyond it's original capabilities in bonds, to embrace the fast-growing mortgage securitization business, as well as buy an asset management unit, too.

Guess what the firm's 'restructuring' entails? Selling a big part of the asset management business and hiving off the disastrous mortgage-related assets into a 'bad Lehman.' Leaving the original non-mortgage, fixed-income business as the 'good Lehman.'

Apparently, it is Dick Fuld's fervent wish and hope that, having cast his major blunder adrift as a separate entity, investors and counterparties will revalue his firm's 'franchise' and let him go back to business as usual.

But it's going to be the same Dick Fuld, minus some of his former employees, operating the 'good Lehman,' who built the 'bad Lehman.'

So, why should anyone believe it will be different now? Lehman, as a firm, has gone through these cycles for decades. The split between Lew Glucksman's traders and Pete (now Blackstone) Peterson's investment bankers drove the old Lehman into the arms of American Express' James Robinson.

Lehman has a history of making mistakes after the fat years, then careening to disaster in the lean years thereafter. This time is really no different.

In fact, I suppose you could even argue that Fuld's pride at being continuously employed by Lehman for so many years assures you that this flawed corporate gene is embedded in him by now.

Lehman can try to split its rotten mortgage assets into a 'bad Lehman,' stick it to shareholders as a special, separate piece of equity, and pretend that the 'good Lehman' is now all better. They can try to retain part of the asset management unit.

But step back and look at the whole picture. Dick Fuld ran Lehman out of control. He got out of his depth, splurged on mortgage assets at precisely the wrong time, and tossed good risk management out of the window.

Now, he claims the core 'franchise' of the firm he has nearly ruined really needs to be saved, due to that core value. The core value Fuld maintains he really has this time.

This is the kind of stupid, myth-based, sentimental thinking that gets business people in trouble. Last night, I sat with my business partner and listed the investment banks operating when I left graduate school, but no longer with us as identifiable firms- Kidder Peabody, First Boston, Salomon Brothers, Drexel Burnham Lambert, and Bear Stearns. Morgan Stanley and Lehman are now seen swirling around the drain, Lehman the closer of the two. Let's not get all misty-eyed over the loss of another one or two publicly-listed investment banks, shall we?

Lehman should simply be dismembered, assets sold, and allowed to sink quietly into oblivion, along with its inept senior management, never to prey on shareholders again.

Lehman- *Sigh*- Again: Are We At The End Yet?

Dick Fuld has almost destroyed all the value Lehman has created in the last 24 years. From a split-adjusted high in the 80s, Fuld's mismanagement and blindness to market realities have resulted in a catastrophic decline in the firm's equity price in the past year.

Looking at the last three months, the firm's equity price has dropped nearly 50%. Yesterday alone it sunk 45% from the prior day's close.

Of course, with so much equity value destruction, it begs the question of when Lehman will finally take the huge capital hit everyone believes it is avoiding. This will result, so the market evidently believes, in inadequate capital levels, prompting a dilemma for regulators regarding the fate of Lehman.

Personally, I am hard put to see how Lehman's failure as a corporation could possibly unravel the global financial system. It's a relatively small, concentrated investment bank. And one so badly run that it really needs to exit the scene.

As I've written in prior posts, most recently this one,

"As I last wrote about Lehman here, last week, Lehman is basically a collection of badly-purchased assets, bad management, and one still-reasonably valuable, separate asset management firm.What's the big mystery about where this is headed?

Neuberger will be spun off, back to management, or sold for cash to another firm. One way or another, further asset value reductions will be realized, shareholder value will be further reduced, thanks to the long term effects of Fuld's ineptitude, and the firm will either shrink or die. Its valuable assets and positions will be taken over by other firms, equity value will take further hits, and the firm will finally leave the competitive field.

You can expect a lot more ink and air time over the precise manner and style of these steps. But you know, as I do, that they are coming- and soon."

Is it this week? Will today's earnings- or lack of them- announcement trigger the denouement of this financial drama?

God, I hope so. It's getting tiresome.

Kill the company, already, will someone? Put it, and those of us witnessing this depressing spectacle, out of our collective miseries.

On Auction Rate Securities & Brokerages

I have written five pieces on the subject of auction rate securities, the latest one found here, less than a month ago. In it, I related the humorous and shocking revelation by James Stewart, a financial advice columnist for the Wall Street Journal, that he, too, was a victim of these instruments. In my post, I wrote,

"Which brings me to a hilarious companion piece in the same WSJ edition.

It seems that James B. Stewart, a regular investment columnist who writes "Common Sense," lost his. He spent yesterday's column bitching about his lack of satisfaction as a 'victim' of the ARS mess.

Stewart alleges,

"It's not like we were clamoring to buy these securities. Like other victims I've heard from, I got a call urging me to take advantage of an offer that was being extended to valuable clients."

For more on this, see my prior, linked post, for my story of the early days of CMOs and their buyers.

But, back to Mr. Stewart. For someone so lofty as to write a column in the WSJ on investing, wouldn't you think he would know better than to offer an excuse like the above for purchasing ARS notes? Really- something for nothing, James?

Free extra returns, just for 'valuable clients?'

I have to laugh, because I've never bought any structured finance instrument in my life. The market-making assurances on these instruments are simply not to be believed.
Anyone with any experience in securities markets would know this."

Now, in an article from the weekend edition of the WSJ, we learn just how misguided and gullible Stewart really was for believing the 'valued customer' hokum.

Here are some of the choicer passages from the Journal's recent piece,

"For years, financial advisers promoted auction-rate securities to clients, friends and even family. Now, in the latest twist of the roiled credit markets, some brokers are siding with customers who allege that the securities weren't as billed. They were widely pitched as higher-yielding alternatives to easily bought-and-sold, super-safe money-market mutual funds -- but investors like Mr. Pellizzetti have been trapped in them since February, unable to cash out at full value after the market for auction-rate securities collapsed.

The auction-market crisis appears to be slowly working itself out. In recent weeks, most of Wall Street's biggest brokerage firms, including UBS, have agreed to buy back more than $40 billion of auction-rate securities from their clients, including individuals, charities and small businesses. Some have reached pacts with state and federal authorities to resolve probes into their sales, while other investigations continue. The pacts may help investors like Mr. Pellizzetti get their money back.

In the wake of all this, a behind-the-scenes debate is unfolding about the role played by brokers. Even as the auction market burgeoned to $330 billion in recent years, many brokers knew little about its inner workings, according to regulatory documents, lawsuits and interviews with brokers and their clients. Does that make financial advisers victims, too, if they reasonably relied on their firms' descriptions of the products, however thin they were? Or are securities brokers obligated to learn as much as they can about any investment they pitch, ensuring they themselves fully understand what they are selling?

Tamar Frankel, a professor at Boston University School of Law, says brokers' legal liability is a bit of a gray area, but her opinion is that a broker is obligated to learn about what he sells. "If he sells poison, he's got to know."

In interviews conducted by Massachusetts regulators and included in the state's complaint against UBS, a UBS financial adviser, Leonard Burd, acknowledged receiving no training on the securities other than marketing materials posted on UBS's intranet, and said he didn't read those materials or know of any risks before UBS pulled out of the market in February.

"All I knew" was that the auctions "worked in my career for 10 years seamlessly, and I had no understanding as to the backdrops of it at all," said Mr. Burd in the interview. Reached by phone, he said attorneys didn't want him to speak to the media.

"According to Mr. Pellizzetti's son, internal UBS sales meetings described any chance of auction failure as 'remote & temporary' explaining that at worst any illiquidity would be resolved" in the very next auction for that security, the claim alleges. After his son left UBS, Mr. Pellizzetti continued to purchase the securities through another UBS broker, the claim says.

One factor in financial advisers' willingness to promote the securities may have been the richer commissions they brought. At UBS, for instance, financial advisers received a portion of the 0.25% reward received by their firms for managing the securities, while no commission was available for putting the same investors in UBS's standard money-market fund, according to the Massachusetts complaint.

UBS denies that its advisers had an incentive to put clients into auction-rate securities.
Some brokers apparently did dig deeply enough to figure out that the securities were problematic. The Massachusetts complaint against UBS cites Jan. 10 emails from Sarah M. Sullivan, a financial adviser in Boston, to a senior manager explaining her reluctance to pitch the securities to clients who wanted alternatives to low-yielding money-market funds.

She had just listened to a conference call by UBS auction-market specialists aimed at boosting sales of the securities, according to the complaint. "We continue to be frustrated by the lack of information that they are providing to us," she wrote. She said she would be particularly concerned about putting any client into the securities just ahead of the April 15 tax-filing deadline. "If there is a failed auction, the client may not be able to access the funds. The bottom line is that rather than moving more cash into [the securities] we will probably be liquidating them for many clients."

She concluded: "Given the strange and difficult environment, it is imperative that we are fully aware of the risk we are taking. We do not want to imperil any relationships over something as 'simple' as their cash investments."

A follow-up email from the senior manager instructed a colleague to "get one of your people on the phone with Sarah ASAP so we can provide the appropriate color." The complaint doesn't detail Ms. Sullivan's subsequent actions. A spokesman for Mr. Galvin, the Massachusetts' regulator, said the state wouldn't comment beyond what is in the filings. UBS declined to elaborate or make Ms. Sullivan available for an interview."

My reason for presenting these extended passages is to refute some truths implied by the WSJ's financial columnist, James B. Stewart.

To wit, I contend that, in reality, you should believe that your broker is NOT:

a) well-informed and educated about what s/he is peddling to you.
b) truly interested in your economic welfare first, before their own.
c) unmotivated by commissions on what they sell you.

When you hear the phrase 'valued client' from a broker, run, do not walk, the other way. Hang up the phone, close and delete the email.

From the Journal's extensive article on the UBS case involving auction rate securities, we see that many brokers simply have no idea of the nature and behavior of many financial instruments which they sell to clients, once those instruments go beyond basic equities, debt and simple money market accounts.

Investor beware.

Kerry Killinger Gets His Comeuppance At WAMU

Yesterday's and today's Wall Street Journal were full of articles regarding the weekend sacking of Washington Mutual's (WAMU) CEO since 1990, Kerry Killinger.

Back in May, I wrote this post discussing the then-existing situation in which Killinger and other smaller 'national' bank CEOs had escaped the axe while destroying tremendous amounts of shareholder value, while Chuck Prince, Stan O'Neal and Marcel Ospel had already been fired at Citigroup, Merrill Lynch and UBS.

In that post, I argued that, Killinger's and other CEOs' continued tenure to the contrary, the real evidence of effective reactions to their incompetent management of their banks was the negative total returns they had earned for their shareholders.

For example, I have included in this post the Yahoo-sourced 1-, 2- and 18-year charts of share prices for WAMU, Citi, Chase, BofA, Wachovia, and the S&P500 Index.

Among all of these crippled banks, WAMU fell furtherst in the past twelve months, losing its shareholders some 70% of their value. But all had negative price changes for the period.

The two-year picture is similar, only in this one, Chase, too, is below the S&P. All the banks again sport negative price changes for the period. WAMU is again the worst of the lot.

My contention is that Killinger's shareholders voted with their feet over the past year. That's why the stock price fell further than those of other banks, on a percentage basis.

Now Alan Fishman has been hired, with a $7.5MM upfront signing bonus, i.e., combat theatre pay, to rescue WAMU.

For once, I agree with Dick Bove, the bank analyst quoted in today's Journal as opining that a new CEO at WAMU won't have any effect on its balance sheet full of rotten mortgage loans.

Thus, as bad a beating as some prior shareholders took to exit WAMU stock, they are probably going to look good compared to the value remaining shareholders have after the sale of the bank Fishman will likely have to engineer.

I know he says he'll get WAMU back into solid financial shape. But, let's be honest. Who will invest in it now? Doesn't it make more sense that, when the Feds find Fishman's five-year plan doubtful, they will help arrange the sale of WAMU, or it's better assets- physical offices, better financial assets, etc., to another financial institution?

Too bad shareholders can't get the board to financially penalize Killinger on his way out. After looking at the nearby price chart for 1990-present, it's clear that Killinger left WAMU's shareholders about where they were when he took over as CEO, except for dividends.

But that's hardly a performance that merits Killinger's haul of, according to the Journal,

"1.2 million shares of common stock....worth about $5.2 million. He also has $14.9 million in deferred compensation and $3.5 million in pension benefits, according to the filing."

So, even after zeroing out the common equity value, Killinger receives about $19MM for wrecking WAMU over the course of 18 years.

Who says crime doesn't pay? Well, maybe just appallingly bad management of a bank?

Boeing's Tough Choice

The machinists' union's strike against Boeing Aircraft has been big news for the last few days.

Among other aspects of the story is that of how much Boeing's situation and fate may be like, or unlike, those of GM and Ford, before them.

Stretching back over several decades, the auto makers caved in to exorbitant union demands, ultimately crippling their manufacturing competitiveness, to add to the Detroit car makers' troubles with designing vehicles which Americans wanted to buy.

If observers of Boeing are correct, then the management of the firm faces a crucial, agonizing choice this month. Do they restart production of their planes, including the already much-delayed 787 Dreamliner, at higher costs, or hold the line on costs and take a prolonged strike, in hopes of preserving their longer-term ability to remain competitive with European and Asian aircraft producers?

I'm not personally expert in the area of aircraft manufacture and assembly management, but it does seem that Boeing's leaders screwed up pretty badly on their outsourcing choices and management for the Dreamliner.

As a Wall Street Journal article noted, it's ironic and rich for Boeing's managers to turn the to workers from whom they took the work, to ask them to hurriedly hand-assemble the first Dreamliners, thus saving management's chestnuts.

The series of charts in this post depict Boeing's, GM's, Ford's and the S&P500Index's price performance over, respectfully, 2, 5 and 45 years.

In the first chart, even Boeing hasn't beaten the S&P in the past two years. It looks uncomfortably like Ford and GM.

Over the five-year timeframe, Boeing looks different. It's trajectory has remained similar to that of the S&P, while it has also remained above the index's curve, as the auto makers fell precipitously.

Since the early 1960s, not surprisingly, the collapse of the auto makers has not been mirrored by Boeing. The aircraft producer has had a fairly solid, upward trajectory, even above that of the index. But it is marked by some fairly severe downward drops. No doubt, it's due to the lumpy nature of the plane-development and order cycle in the sector, as well as periodic problems in Boeing's business.

It seems that every 7-10 years see a need for the firm to incorporate recent technology and change design and/or construction practices, which seem to lead to investor concerns and a fall in Boeing's total return.

In this decade, except for the past two years, the company has been on a tear. So this strike would seem to be a key turning point.

One key lesson of the auto makers was that unwise concessions on labor rules, pensions, etc., allowed smooth near term production at an ultimate expense of perhaps fatally wrecking both Ford and GM.

Just on that basis alone, Boeing should probably hang on to its flexibility options, regardless of near term production and market share consequences. There will be other planes and market share battles. But labor union battles have very long term effects.

And the business of designing and producing aircraft is, indeed, becoming more like the automotive industry, not less. More foreign competitors are entering the business. Scale is necessary to afford new technologies, meaning those technologies are released to more competitors faster.

If anything, Boeing will probably face more competition as time passes, not less. From China, India, and even continued improvement from Brazil's aircraft producer.

Since American competitive advantage ultimately rests with intellectual property, innovation and change, it's probably the wrong way to go if Boeing agrees to less flexibility and more union control over its decision-making.

The firm has evidently botched the Dreamliner's outsourcing. Maybe it has learned valuable lessons that it will use to prevent a repeat of the Dreamline fiasco. Maybe not.

But for the sake of Boeing's shareholders, the management of the firm should probably bet that it has, and fight for the right to continue to make those calls.

Treasury's Takeover of Fannie & Freddie

As I wrote in this recent post, there really is a lot less than meet the eye to the necessary consequences of the weekend's takeover by Treasury of Government Sponsored Entities and mortgage finance conduits Fannie Mae and Freddie Mac.

The bare minimum action required in this market situation is for Paulson's Treasury to stand behind the value guarantees of any of the GSEs' issued mortgage-backed securitization instruments. That is, to assure the same level of valuation implied by the original government backing, regardless of whether Fannie or Freddie exist.

I checked with my mortgage banking veteran friend B this morning, by phone, to see if I had missed anything. His most recent views on this mess were presented in this post, written almost two months ago, which featured an email of his to me, pasted verbatim.

Despite much public hand-wringing, including a local radio station's excited headline at 6AM this morning that,

'the Treasury stepped in to rescue the two mortgage companies in order to prevent the collapse of financial markets and, quite possibly, followed by the US economy,'

the only real crisis, as Paulson articulated in his public comments, was that of investors, including foreign governments and institutions, losing confidence in the US government guarantee of Fannie and Freddie securitized instruments.

The continued operation of both firms as conduits for securitizing mortgage loans really isn't a critical issue right now.

Again, despite breathless questions on CNBC this morning of a Republican House member who is voting against the takeover as to what he would say,

'to a constituent of yours who is just out of reach of a mortgage now, thanks to this takeover failing and the mortgage markets seizing up,'

I don't see that as a problem. Neither does B. He warns me that it is a political issue how to clear out the GSEs from the conduit business, in order to usher back in private sector players.

But it's not an economic one. And, again, contrary to CNBC's 'task force' which worried on air about whether or not the mortgage securitization business should exist, let me make something clear. Just because a poorly-run pair of GSEs messed up in no way means it is an unattractive, nor unnecessary market activity.

But it clearly is not one to be performed by Fannie, Freddie, or anything structured like them.

High quality, 20% mortgages are still being made in the US. These were the backbone of the sector for decades. Problems arose when sector executives decided to stoke growth by reducing the percentage of downpayments they would accept for mortgage loans. When the downpayments became too lean- probably somewhere between 5-10% - the model failed. Housing prices dipped by more than the downpayments, wiping out the owner's equity in the home, and triggering defaults.

But this isn't a function of Fannie or Freddie, per se. It's the fault of private-sector, publicly- and privately-owned banks.

The existence of Fannie and Freddie really have little to do with this. Sure, they took the resulting mortgages and securitized them. But bankers made the loans to begin with.

If the mortgage securitization business has been poisoned by the bankers themselves, due to bad risk and growth management in the past decade, then they have nobody else to blame for the moribund market. B thinks it may indeed, as I surmise, be at least five years before private conduits can flourish in the wake of Fannie and Freddie.

Until then, US mortgage finance may temporarily return to the old days of local and regional financing.

But, until all the weak and badly-managed players are gone from the sector, investors won't touch mortgage-backed securities anyway.

All the more reason for Paulson to kill off the GSEs entirely, as I argued in that first linked post from last month. Guarantee the securitized instruments, pay off the GSE bond-holders, pro-rata if necessary, then leave shareholders with the remainder, if there is any.

In time, if it's profitable, mortgage securitization will be provided by good-quality banks by selling off their portfolios of mortgage loans again, like they used to before Fannie and Freddie began increasing the sizes of the mortgages they accepted, and gobbled up so much of the securitization market.

John Mack's Old & Tired Ideas For 'Refocusing" Morgan Stanley

The weekend edition of the Wall Street Journal carried an article describing John Mack's efforts to 'refocus' Morgan Stanley.

The lead sentence in the piece tells you the trouble Mack is courting,

"For two weeks in July, Morgan Stanley Chief Executive John Mack moved into an office near the research analysts who work at the Wall Street firm's headquarters in New York's Times Square. He had two goals: boost morale in a unit hit hard by layoffs and figure out how to squeeze more value out of stock research."

John, do you recall a guy named Elliot Spitzer? Do you remember what he charged many Wall Street firms with doing? Including your own, Morgan Stanley, regarding Mary Meeker?

As I recall, Spitzer reached a major, sector-changing settlement with your firm, and others, for ....squeezing more value out of stock research!

Mostly by improperly attaching it to trading and investment banking, so access to star analysts, and their involvement in boosting firms underwritten by their own firms, shifted their work from independent, objective research, to mere marketing on behalf of clients and trading desks.

A friend of mine, formerly a senior communications systems management at Lehman, now at a major tech firm, confirmed this for me last summer. He regaled me with stories of 'research analysts' getting in on the pitch to prospective underwriting clients on how they would support the new client via opinions to institutional clients and their own trading desks.

This is the sort of thing that the storied settlement was supposed to change.

Now, John Mack is reportedly,

"Since having dinner with research division leaders and informal chats with analysts as part of his two-week immersion, Mr. Mack has been talking with lieutenants about what should be changed in research. One challenge: quantifying the value generated by good ideas used by both the firm and its clients. The topic has come up several times at recent weekly management-committee meetings."

First, isn't that the holy grail of Wall Street? And has been since time immemorial? Please tell me, John, that you don't really think this is new ground you are plowing.

"Quantifying the value...." of research is the age old quest of brokerages trying to figure out what those expensive eggheads actually do to make money for the firm.

And, since the modern brokerage has three major businesses- institutional sales/trading, proprietary trading and underwriting- the analyst must be adding value to one or more of these, if s/he adding value at all.

The first and third businesses are exactly where Spitzer's hunt focused- improper use of analysts to win underwriting and then lever those products into institutional trading clients.

Using analysts to improve proprietary trading is, of course, an obvious path. But if this were simple and effective, wouldn't it already have been done? Then, again, the really good analysts, eventually, become money managers. So maybe that's not as simple as it seems. And it puts great pressure on analysts to produce consistently and well. Maybe that, too, doesn't work so well in practice as in theory.

It just strikes me, from the Journal article, that none of Mack's alleged new ideas is actually new at all. And if they are known to work, wouldn't the article note that, too?

As the nearby five year price chart for Morgan Stanley and the S&P500 Index indicates, it's been a terrible 18 months or so for Mack and his battered shareholders.

It seems to be another stumble of John Mack's on the long journey through the desert of bad performance on which he has led Morgan Stanley these past few years.

Boone Pickens' Energy "Non-Plan" & Inflation

Normally, I clearly separate my political sentiments from my business/economic ones. That's why I have my companion political blog.

However, this recent post is post-, trans-, bi-, or maybe non-partisan. Or whatever word is in vogue and applicable.

No matter which party or who champions Pickens-style energy solutions, there's something nobody is telling you about these alternatives and inflation.

But I am.

Rebuilding New Orleans- Again

Nearly three years ago, I wrote these two posts, here and here, regarding the aftermath of hurricanes Katrina and Rita on the US Gulf Coast. Holman Jenkins of the Wall Street Journal shared my sentiments in his editorial on the same subject of how, or whether, to rebuild New Orleans. I wrote in the first post,

"If they want the final say in rebuilding their city, then let them earn it. Ask for help borrowing capital that they will repay with a revitalized port, energy-related commercial zone and tourism areas that are safe and survivable. Rather than issuing demands that the rest of us, through the conduit of the federal government, simply hand over more than $100B to those government entities to spend as they wish. It takes a lot of gall to request/demand $100B to rebuild a city that wasn't safe in the first place, while seeming to stiff-arming the very people from whom they want the money when questioned as to how and why the reconstruction is to take place.

After all we have heard regarding the importance of the area to agricultural transport, energy production and distribution, and other general shipping needs, I don’t understand why the local and state governments can’t borrow against their infrastructure-based revenues to rebuild. I’d prefer to see the funds coming from increased prices paid for goods passing through that region to pay for the new and improved facilities, funded by bonds, than to simply hand over $100B to local and state governmental authorities.

Nobody questions the need and value or rebuilding damaged commercial infrastructure to standards which can better withstand a major hurricane, so long as that cost is economically rational. Either private or public revenue-backed bonds would seem to be feasible. If they can't attract capital, based upon the expected costs and revenues of improved and repaired facilities, then it begs the question of rebuilding commercial facilities there in the first place. What seems to be more in doubt is what kind of residential reconstruction is reasonable. Holman Jenkins wrote an excellent editorial about this in the Wall Street Journal two weeks ago."

And, as I wrote in the second linked post, the mistakes are not confined to the public sector,

"What is it about the Carolinas, Florida and the Gulf Coast? Living in a hurricane belt, you would think that the business owners and residents of the region would have shown more foresight regarding the potential damage from these storms when they build their facilities, homes and cities.

Take oil refineries, for example. I saw an interview with Lee Raymond of ExxonMobil on CNBC this week. He opined how until the past few weeks, he had never known how many experts on oil refineries there were in the US. That’s a pretty funny remark, until you let it sink in a bit.You don’t have to be an expert at building or operating an oil refinery to realize that concentrating so much evidently unprotected, vulnerable capacity in a hurricane zone seems like inept business planning. The oil industry executives bemoan over-zealous environmental regulations, but the net effect of their decisions on refining capacity and locations over the years is to be unable to keep pace with the growth of their customers’ demands for refined petroleum products."

Yesterday's excellent reprise of his three-years-ago editorial by Mr. Jenkins asked the question,

"Does the federal government have to be responsible for everything?"

He noted the difficulty homeowners had getting coverage in New Orleans after Katrina. Jenkins observed that local government officials viewed that as a 'problem,' whereas, in truth, it is the 'solution.'

Jenkins went on to write,

"No Louisiana politician will publicly write off the large submarine sections of the city and its suburbs. Yet the state in December disbanded the Louisiana Insurance Rating Commission, kicking over its portfolio of suppressed rate increases to the state department of insurance....No doubt local voters and politicians would decry it as a crime if New Orleans were forced to become a smaller, higher city because of such "greedy" behavior by insurance companies. The rest of us would see it as a sign of hope for our economic future after all."

He is right.

As I listened to Cindy McCain draw attention to those New Orleans residents who have been forced to flee, then will return, for the second time in three years, the absurdity of her observation hit me.

Back in my youth, the local Illinois river regularly flooded a low-lying area of squalid shacks a few miles upstream from Peoria. The newspaper and most of the town's citizens castigated the residents of those hovels for continually rebuilding in a designated flood zone. Eventually, flood insurance for the area was revoked, and the nonsense stopped.

Why should New Orleans be any different? As I noted in that earlier post, thanks to Holman Jenkins' initial observation, it was known as the Crescent City for a good reason. That crescent was the high ground which, in the days before the extensive levee system, was the only constantly-inhabitable, relatively safe area in which to reside.

When people flee and return to a weather- or other natural-disaster-prone area several times in a decade, it's time to end the insanity and cut off insurance and relief for those people. Anyone foolish enough to remain there should do so on their own hook. If businesses choose to locate there, then the resulting prices for their products had better cover their disaster losses. Meaning, of course, there'd better be something extremely differentiable and special about those products or services.

It's not a good thing that Jenkins and I are, three years after Katrina, lamenting the same idiocy regarding the rebuilding of troubled, ill-sited New Orleans.

Business Media's Continuing Focus on Lehman

CNBC and The Wall Street Journal have continued their focus on ailing investment bank Lehman in the past week. This morning's Journal carried an article on the firm's new president and COO, Herbert "Bart" McDade, while CNBC has been running pieces by Charlie Gasparino for weeks. Charlie breathlessly confides his latest inside information on the crippled financial firm.

Honestly, I'm not sure I understand what all the fuss is about.

Yes, I do realize that, in a slow August summer season, Lehman's death-throes create stories, fill airtime and columns. Yes, I understand it's entertaining.

But from a business sense, the coverage has gotten out of hand, hasn't it?

Today's Journal piece opined on "Bart"- you have to love these Wall Street nicknames- McDade's potential to be Lehman's next CEO.

Does anyone else even think there will be another Lehman CEO? Or that, if there is one, it will be either for longer than it takes to sell the wreckage to another firm or firms, or, be hardly worth having, so small and insignificant will the impaired financial firm have become?

Earlier last week, the talk was all about Fuld creating a 'good bank, bad bank' structure to try to spin the bad assets at par value, in a tax free transactions, off of Lehman's balance sheet.

Then there was the article about Lehman's real estate interests, via loans to a large California land warehouser. Maybe they haven't properly written down the value of much of their exposure, an article contended.

The background drumbeat for all of this is Lehman's impending quarterly earnings announcement. All this planned pirouetting on the balance sheet is allegedly Fuld's attempt to delay or minimize further large losses on Lehman's rotten real estate-related assets.

As I last wrote about Lehman here, last week, Lehman is basically a collection of badly-purchased assets, bad management, and one still-reasonably valuable, separate asset management firm.

What's the big mystery about where this is headed?

Neuberger will be spun off, back to management, or sold for cash to another firm. One way or another, further asset value reductions will be realized, shareholder value will be further reduced, thanks to the long term effects of Fuld's ineptitude, and the firm will either shrink or die. Its valuable assets and positions will be taken over by other firms, equity value will take further hits, and the firm will finally leave the competitive field.

You can expect a lot more ink and air time over the precise manner and style of these steps. But you know, as I do, that they are coming- and soon.

I suppose you could arrange a pool with your colleagues to bet on whether or not Lehman will be around to issue a 4Q earnings release. Or the date on, or month during which the firm will finally cease its existence.

But isn't that about the only real mystery left in this story of greed, ego, and bad management on Wall Street?

Boone Pickens Fires Back At Holman Jenkins

Boone Pickens wrote an editorial in the Wall Street Journal on August 6th of this year in which he unveiled his plan for American energy development and usage. The next day, Holman Jenkins, writer for the Journal, replied via his weekly editorial, on which I commented in this post. Yesterday, Pickens fired back at Jenkins in a letter to the editor in the Journal.

For me, the crux of Jenkins' remarks, some of which I had already written prior to his editorial, were, as I wrote in that earlier post,

"Echoing my own position, as expressed in this post from February of this year, Jenkins calls into question Pickens' outrage that America spends some $700B per year for foreign-produced oil.

He characterizes the purchases as a fair exchange of value for value. Then lampoons Pickens by asking if he would be similarly exorcised to learn that the US also accounted for 23% of worldwide advertising purchases?Going beyond my economically-based criticism of Pickens' hand-wringing over foreign oil, Jenkins then finds justifiable fault with the description of Pickens' effort as a 'plan.'

He's right. I have, in the past few weeks, heard several people question the viability of a LNG car. No less a car salesman than Mike Jackson, CEO of AutoNation, pointed out that such a car 'has no trunk,' and can't be driven anywhere, anytime. It is pretty much restricted to being a short-distance commuting car.

Further, I've read some reports that the vaunted wind power on which Pickens hangs so much of his 'plan' is not quite as efficient as is claimed. Allegedly, California wind farms generate only about 20% of their rated power."

Pickens attempts to refute Jenkins', and my, criticism that the fact that the US imports oil at $700B/year is not, by itself, a problem. Unfortunately, Boone doesn't have a clear, disciplined approach to economics in this instance.

His retort is essentially a restatement of his original cry of alarm. Nowhere, for example, does he explain why it is okay for the US to import much of its steel, and probably all of its titanium, as well as some other rare, strategic minerals used in defense production.

If Boone could tell us why oil is so special, his position might be more tenable. But he does not refute Jenkins', and my, suspicions that America makes good use of that oil, creating much more than $700B of value-added which is, in turn, bought by others around the globe.

Sure, relying on others for 70% of a key commodity is risky. But that's a different argument, as Jenkins and I both noted, than the economic one. Pickens mixes the two in an intractable tangle of verbal warnings.

The remainder of Pickens' editorial simply restates his by-now familiar wind/natural gas concepts.

I write concepts because, as Jenkins noted, Pickens never provides details of how these alternative energy sources will magically be distributed across the continent.

For what it's worth, in addition to the faults Holman Jenkins noted, I added in my post,

"Finally, as I wrote in this post early in June, why doesn't Pickens mention coal and synfuels?The US is as rich in coal as it is in wind. And we know that coal can be gassified to become liquid hydrocarbons at no more than $5/gallon. Probably substantially less than $4/gallon if properly incented by Federal pricing and volume guarantees.

Such a fuel would require no new vehicle designs, distribution systems, nor diversion of natural gas from its use to generate electricity in the US."

Pickens ends by claiming he has now represented his plan, writing,

"My father used to tell me that a fool with a plan is better than a genius with no plan. So I ask, what's Mr. Jenkins's plan?"

In my opinion, Pickens still doesn't get it. Anyone can stand up and say we should use domestic natural gas and wind power. Fine. We should drill for oil offshore and in ANWR, too.

But that's not a plan. It's more of an overall approach to substituting domestic energy sources for imported oil, despite potential economic penalties, in order to provide more security for our energy sources.

Although Pickens is fond of citing how few of the world's natural gas-powered vehicles are in the US, he avoids telling you what Mike Jackson does- that those cars can't replace all the capabilities of the current, modern, average US car.

If yesterday's editorial was Boone Pickens' best reply to Holman Jenkins' criticism of his energy 'plan,' then I think Boone has a lot of work to do before anyone should follow his prescriptions.

He may be correct in warning that we are sending $700B to potential or real enemies, in exchange for their oil. But that does not mean you should necessarily accept his concept for a solution.

As I stated in my original post on Pickens' energy plan, and Jenkins echoed, it is unclear to me that, merely on economic bases, importing $700B of oil is a bad thing for the US economy. We import plenty of other commodities, goods and services, on the bases of David Ricardo's 'law of comparative advantage.'

If, however, we now believe that it is vital to keep US dollars out of the hands of those who own oil around the globe, then we can and should expect to pay an economic price for producing domestically the substitutes for imported oil.

Isn't that going to result in a lowering of American standards of living, and perhaps some inflation, as well?

How do you answer those questions, Mr. Pickens?

More On Ed Lampert's Failure At Sears

Last Friday's Wall Street Journal carried a breakingviews.com article reinforcing yet another of my contentions. This time, they entitled their piece, "Mr. Lampert, Fire Thyself."

My last explicit post on Sears and Lampert, here, I noted that his foray into the retailer as its CEO had failed.

The recent picture of the firm's 2-year stock price performance, when compared to the S&P500 Index, tells the same story.

Since that post in January, the price of Sears shares has fallen precipitously, then recently bounced, to end lower than it was early in the year.

For what it's worth as empirical evidence, my daughter and I visited a KMart in West Virginia this summer. In contrast to the well-stocked and -staffed Wal-Mart down the road, the KMart was disorganized, ghostly, and very unappealing as a place to shop. Things hadn't changed much in the store's ambience since the days of my very first job working at a KMart, circa 1973.

Having lost some 60% of the firm's value since mid-2007, Lampert's ill-considered attempt to operate the retailer has cost shareholders plenty.

In this case, I think the breakingviews folks are correct. Lampert should fire himself, once he has attracted a veteran liquidator to come in and extract what value remains in the combined Sears-KMart operation.

Perhaps some of the old Sears brands, such as DieHard batteries, Kenmore and Coldspot appliances, and Craftsman tools can be sold off to other retailers in those businesses. After that, perhaps some of the real estate still has latent value, despite what I read about much of it being tied up with clauses involving being an anchor tenant in various malls.

Like many other once-great American businesses which have essentially seen their business model evaporate, Sears should simply be dismantled, before all the value shareholders might receive is needlessly spent on the turnaround that will never come.

A Detroit Bailout?

The Wall Street Journal's weekend edition carried an article by breakingviews.com contending that the US automakers headquartered in Detroit are seeking government aid during this Presidential election as a way of avoiding bankruptcies.

For what it's worth, the column agreed with my overall diagnosis of the auto sector in its entirety, even down to the detail of noting that the Carter-era bailout of Chrsyler was not a success. Instead, the company faltered again in the mid-1990s, selling itself to Daimler.

It amazes me that Ford and GM would have the gall to ask for government assistance when they caused their own troubles. Further, to use an election year as an opportunity to effectively hold Michigan votes hostage to the candidate who promises the most financial aid to the companies is unseemly and wrong.

Hopefully, either or both major party Presidential candidates, if forced to consider paying some form of electoral extortion, will focus on aiding the displaced workers of the companies, not the companies themselves.

Whether it's airlines, steel, auto making or even banking, our government needs to stop even entertaining the idea of assisting failing companies.

Our economic system works through rewarding successful business models and using the resources of failed companies- people, physical plant, intellectual property- as material for new growth. We must let capital and consumer markets judge the management of companies via sales and equity prices.

There are growing, successful auto makers in the US. They have names like Toyota, Daimler, and Nissan. We need to allow them equal special treatment with mismanaged auto makers, which is to say, none.

If Washington will stay out of the way, the valuable parts of Ford and GM will find their way to ownership by other global auto makers, and the workers who can add value will also remain employed.

The rest will and should be liquidated to provide resources for fresh growth in the US economy.

Dell's Further Demise

The last time I wrote about Dell was in this post, last January. I contended in that piece,

"Why do you suppose that these CEOs, as a group, mostly failed to move their firms to consistently superior total return performance?
In Dell's and Starbuck's cases, I question if they ever will. I believe, for reasons I've discussed in labeled posts on both CEOs and their companies, that competition, growth and simple Schumpeterian dynamics have worked to end their time of consistent outperformance."

Over a year ago, in April of 2007, I wrote this post, in which I opined,

"Finally, someone there said something with which I can strongly identify. Not that I ever expected it from staffers at firm, founded by Jim Cramer. But one of their number spoke truth to power last week on CNBC, boldly contending, about Dell's recent malaise and accounting troubles,

'who cares? it's an old tech has been,' or words to that effect.

When the CNBC on-air anchor/interviewer sputtered unbelievingly, and stated that many people have a lot of money in Dell, and it's a big company, the Street guy retorted something like,

'so is Xerox. How big is its market cap? Does anyone think it is a leading tech firm anymore?'

Very well put. Big does by no means equal important. Often, it simply means 'still bloated and primed to collapse like a souffle' when sufficient technological change finally sweeps away the last of its ancient underpinnings. Like Kodak. A victim of corporate senescence. Its best days of profitable growth are in the rear view mirror. Consistently superior returns, if they ever happened at Kodak, are a thing long past."

According to today's Wall Street Journal article about the aging PC maker,

"Dell, Inc. reported a 17% drop in quarterly profit, raising questions about the company's 18-month turnaround effort and whether a slowdown in business spending is spreading to Europe and Asia."

I'd say Dell's latest quarterly results answer questions, rather than raise them. Specifically, they confirm that Dell, while still producing laptops and desktops, will probably never regain its prior record of consistently superior total returns for its shareholders.

Dell had to spend heavily to raise its revenues 11% in the last quarter. In effect, whatever goodwill and consumer franchise it once had that enabled it to enjoy higher margins is gone.

The nearby Yahoo-sourced price chart of Dell and the S&P500 Index for the past two years shows that the computer vendor only outperformed the index for the past four months.

For an investor, that means you have been taken for a mostly loss-ridden ride over two years, unless you happened to time your entry- and maybe exit- just right.

This isn't a resurgent performance. It's a technical bounce for a few months.

The fact that most of Dell's initiatives now involve cost-cutting is a pretty good sign that its days of profitable growth are past.

As I've written about this once-great computer maker before, it just isn't going to be coming back as an equity to own. It will make computers, and sell them. But as an investor, you are unlikely to be able to enjoy consistently superior returns from simply holding Dell anymore.

Current Equity Derivative Market Conditions: Moving Away From Puts

As part of our derivatives portfolio investment risk management, my partner and I keep a close watch on current conditions. We check our proprietary equity-related volatility measure on a daily basis, as well as frequently observe a market return-related measure, to assess whether we should be in calls or puts.

In this post on July 1st, I noted that our equity allocation signal had gone to a 'short' position. Just a few days prior to that, I wrote here that,

"Back in April, I thought we had a good 4-5 months of call options portfolios before we had to worry about weakening markets. Instead, in only six weeks, we're somewhere between neutral and short in our evolving outlook for equity allocations in the next month."

We bought puts in July and August. Marking the absolute point of inflection somewhere in mid- to late-June, when we sold our April, May and June calls, the period for puts has lasted roughly 10 weeks.

Based upon recently falling values in our proprietary volatility measure, and a slowly, stubbornly-rising S&P return for August, we now anticipate liquidating our put positions within the next week.

It would appear that investor sentiment has changed markedly from the mid-summer skittishness. As my partner and I reviewed the recent developments in financial and commodity markets, as well as the economy, it would appear that several sources of investor aggravation this summer have abated. Commodity prices- including energy- have fallen, Freddie and Fannie are presumed to be the object of a takeover by Treasury, and economic performance continues to be lackluster, but not a severe recession.

Thus, the volatility typical of downward-moving equity prices and capitulation has seemingly ended.

Thus, we expect our September's options portfolio to be either a straddle of puts and calls, or just calls.

As we have observed the performance of our put portfolios for July and August, as well as a synthetic June put portfolio, we have noted that puts seem to lack the concentrated energy and consistent advances of call portfolios. Additionally, the time periods over which puts remain the preferred side for investment are, on average, far shorter than those for calls.

Mirroring the infrequency of periods of short equity portfolio allocations, put portfolios don't occur as frequently as call portfolios, either.

Together, these characteristics make the periods during which we invest in puts more risky in general. We condition our expectations to be for shorter timeframes in the puts, and, after observing the performance of the June and July put portfolios, much lower returns, as well.

We still believe that put portfolios can provide positive returns during periods of serious equity market downturns. However, we are learning more about how much shorter are the effective durations of those portfolios, and how much less, on average, their positive returns can be.

Privatizing Toll Roads

Yesterday's Wall Street Journal's front page featured an article on the imminent privatization of the Pennsylvania Turnpike. Generalized to other state highways, as well, the piece catalogued the reasons why this trend has become more pronounced.

While the article noted the obvious reason of quick, present-valued money for cash-strapped states, and the predictable cries by labor of the loss of high-paying patronage jobs, it was silent on two important issues attached to this topic.

The first is one of competence and long run cost curves.

Does anyone with a brain actually believe there are sufficient numbers of competent highway system mangers in each state with their own, e.g., Pennsylvania, New Jersey, Indiana, to run these transportation systems well and profitably?

It seems to me that the trend of investment funds buying these formerly publicly-owned and -managed roadways is a very good thing. They clearly can leverage expertise and scale of management of these operating assets across many highway systems.

But what struck me as odd was the issue missing from the Journal article. Nowhere did the piece mention what is really going on with these sudden privatizations.

Any way you cut it, states are turning to private enterprise to lease their toll roads because they simply can't raise revenues. Thus, they are literally mortgaging a capital asset and consuming the asset value as ordinary operating funds.

As I read a webpage discussing the history of New Jersey's Garden State Parkway, I noted the periodic mention of 'self-liquidating' and 'self-funding' toll road. The intent was clear- the highway was to pay for itself with tolls collected from drivers on the road.

If that were true, and a third party bid on a lease for the road, how could they make a profit if the highway were truly self-funding?

Either an unrealized capital value existed in the road, which is now being consumed without telling voters/residents, or the lessee plans to extract income from the road in excess of current tolls, in order to generate their profit.

My guess is the former is the case. These states are silently extracting capital value from the roadways and consuming it to run their states.

In the case of my current state of residence, New Jersey, its spending has long-ago outstripped the viable, continuing tax base for the state. It is living beyond its means.

Thus, while the operating effects of these highway leases are probably ultimately beneficial to taxpayers and drivers, the net effect of the asset value transfer and consumption is to silently tax and spend public money without notifying voters.

This is the phenomenon which is, I think, the most telling in this story. In an era when US transportation infrastructure is becoming suspect, and probably in need of serious investment to maintain commercial viability for our economic growth and welfare, several states are silently going the other way. They are surreptitiously draining capital from their transportation systems, i.e., toll roads, and spending this capital for normal operating purposes. In a matter of months, or, at most, a few years, that capital will be gone.

Recent Central Banking Errors

The Wall Street Journal carried an article last Saturday written by 'breakingviews.com,' the outfit that occasionally targets a good topic with substandard analysis, entitled "Honest Central Bankers..."

According to the crew at the tiny research outfit, the world's influential central bankers committed three mistakes in the recent past:

1. Failure to consider the "dangers of financial deregulation."
2. Excessive pride in managing "steady economic expansion and moderate inflation, but we should have been humble about wild asset-price inflation."
3. They were "remiss in not considering the distortions created by an annual US trade deficit the size of the Dutch economy."

I continue to be mystified as to why, with their equity interest in breakingviews.com going to zero, the Journal still publishes these lightweight pieces on the valuable top-left of the back page of the paper's Money & Investing section.

That said, the topic is worthwhile. Looking back over the past 12-14 months, we see the greatest dysfunction in credit markets at least since the late 1990s sovereign reneging on debt by Russia and the LTCM mess.

How much of this recent- and continuing- debacle is really the fault of the two major central banks, the American Fed and the EU's central bank?

If central bankers made mistakes, I don't actually think they were the three identified by breakingviews' analysts.

Once a nation decides to allow substantial private monetization of future valuation potential, the central bank isn't really in control of the supply of liquidity or even 'money,' in its practical meaning, anymore.

When private enterprises can routinely issue large amounts of bonds, similar to what occurs in a Fed open market action, they pump up money supply totally out of the control of the Fed. There's a reason the old 1950s-era credit controls were in place. But having moved beyond that era, we really cannot now return.

The Fed and the EU central bank don't really control asset-price inflation, nor can they, except, for example, by some slight regulatory oversight to at least assure the creation of high-quality mortgage assets, instead of low- or no-down payment mortgages.

Thus, mistakes one and two aren't, in my opinion, valid accusations of central banks in this era.

Alleged mistake number three is also incorrect. Ricardian economics assumes all participants are doing something of value. Exchange rates take care of the imbalances of trade flows.

What, exactly, do the geniuses at breakingviews suggest the central banks should have done to affect commercial trade flows between nations and currencies? Return to old-style, fixed or pegged exchange rates?

Once again, this is a non-issue for central banks.

The one thing I believe of which the central bankers were and are guilty is simple misperception of the consistency and non-normalcy of the drivers of recent inflation- energy and commodities- as Brian Wesbury pointed out in a Wall Street Journal editorial about which I wrote, here. There was another fine editorial covering some of the same ground in the past week in the Journal, although I have forgotten who were its authors. Essentially, they correctly accused Greenspan of freely spending the credibility Paul Volcker had bought for the Fed with his effective breaking of inflation in the late 1970s and early 1980s, in concert with Ronal Reagan's equally-effective fiscal discipline.

Largely due to Alan Greenspan, we now see, the Fed began to unwisely pump money supply in the early 2000s, leading to today's inflation. While there are other monetizers besides the central banks in our modern economy, when the central banks inflate, it still causes inflation.

Between Greenspan's cavalier dissipation of the Fed's inflation-fighting credentials of the Volcker era, and Bernanke's political timidity last year in keeping rates high while using the Fed's discount window to assure liquidity to the collapsing financial fixed-income sector, the US central bank has all but lost its ability to convince holders of dollars that they will not be robbed of value by inflation.

Would it really have been so hard for Bernanke and his colleagues to see recent energy and other commodities price rises as the results of growing demand in economically-maturing India and China for these products in the face of poor demand forecasting by their producers?

That inflation measures including food and energy were valid because what was occurring was not seasonal or occasional price volatility, but a secular, if temporary, upward trend due to forces of supply and demand?

I honestly thought that Bernanke was smarter than he has appeared to be in the past year. Adding his indecision to the results of Greenspan's egotism have given us an inflation rate heading to heights we haven't seen since Reagan took office.

Funny, isn't it, how both US economics and political choices seem to both stand at crossroads last faced when the Gipper- and Tall Paul- were there to help our country make wise choices.

Sadly, too few Americans are of an age who recall this.

What Is Lehman Really Now Worth?

The weekend edition of the Wall Street Journal reported Lehman shares rising 16% on alleged interest in the ailing investment bank by the Korea Development Bank. However, later reports indicated that the bank was not anywhere near a deal to rescue Dick Fuld's house of cards, a/k/a Lehman Brothers Holdings Inc.

With all of the write-downs and drama involving Lehman's fighting with a prominent bearish hedge fund manager regarding its asset valuations and losses, one has to wonder, at this point, just what is the firm actually worth?

What would a buyer presumably be acquiring if it were to bid for Lehman?

It wouldn't seem to be getting good management. Fuld and his obliging lieutenants are now on record, asset-valuation style, as having made disastrous operations decisions in the past few years. To quote the Journal's piece,

"Friday's stock-price surge shows how hungry investors are for nearly any scenario that would help Lehman finally rid itself of the doubts and problem assets haunting the firm."

How'd those problem assets get on Lehman's balance sheet? Did some wicked finance fairy drop them there one night? Or did Dick Fuld's managers buy them of their own free, if misguided and ill-considered wills?

Granted, Lehman owns asset manager Neuberger Berman. This is a classic example, on a par with GE, of how collecting unrelated businesses does nothing much in the long term for shareholders that they cannot do better themselves. It's a good bet that Lehman, being under pressure, will have to sell Neuberger for less than if the parent were not in financial straits. I don't know the accounting, but one would hope that at least Lehman is going to get more for Neuberger than they paid for it.

In the meantime, since Neuberger, being in a different business than the rest of Lehman, presumably was unaffected by the parent's bad risk management decisions, Lehman shareholders are left with the problem of what they actually own that isn't easily sold.

Or won't be sold to someone for more than it is probably actually worth in the long run.

Having messed up Lehman's balance sheet and, due to the write downs, income statement, Fuld's team would not seem to be the reason anyone would buy the firm. More likely are two other reasons.

One would be a bottom-fishing private equity firm that is interested in fire sale prices for exotic instruments that may actually perform reasonably well over time. As I've written elsewhere in prior posts, non-bank, non-publicly-held financial service firms can afford to buy and hold instruments whose market values are now crippling publicly-held institutions.

A second reason for buying Lehman might be the overall pressure on virtually all of its assets, given Lehman's near-death situation. There are probably some decent assets, either for trading or investing purposes, which aren't damaged due to problematic market values, but only because they are on Lehman's balance sheet.

If the dross can be bought sufficiently cheaply and either sold or simply held at little cost, then the decent assets might pay off as they rise in value when held by a going concern with a viable future.

Either way, it wouldn't seem that any of the assets on Lehman's balance sheet are now worth to the firm's shareholders what they will be worth to almost any other firm which can buy them.

And for that, they have Dick Fuld to thank, for having managed Lehman to the point that it's continued existence, being doubtful, has now placed a large discount on the value of any assets which the firm currently owns.

So let's be clear. Are we discussing the sale of Lehman, or simply the sale of its assets, as the firm is dismembered in the wake of bad management?

I believe it is the latter.

And, oh, yes, Dick Fuld (and probably a few very close lieutenants) will keep some juicy past bonuses and other compensation, while shareholders will, as usual, be left holding the empty bag. Don't expect Fuld to offer to repay any of his past lush compensation in exchange for the losses his shareholders will now suffer. This is the Wall Street way. Bonuses for the managers now, losses for the shareholders later.