Investors’ worries shift to Lehman Brothers
NEW YORK: Shocked by the rapid demise of Bear Stearns and its fire sale to JPMorgan Chase, investors are worrying about Lehman Brothers and several other financial companies.
Lehmans shares began Monday 35 percent lower than on Friday and recovered slightly, ending at $31.75, down $7.51, or 19.1 percent. A whopping 224 million shares traded hands, or 16 times the normal volume.
Since the U.S. mortgage market crisis unfolded in the summer, investors have fretted that Lehman Brothers would stumble, and its stock has fallen from a peak of $82 a share then. It was a major player in the market for subprime and prime mortgages, and it is the smallest of the major Wall Street firms.
Still, the storied investment bank has defied expectations more than once, as in 1998, when it seemed to teeter after a worldwide currency crisis, only to rebound strongly.
“Its not surprising that people are looking to Lehman next,” said Jeffrey Harte, a brokerage stock analyst at Sandler ONeill Partners, a Chicago-based research firm. He said Lehman and Bear had a number of similarities. Both had relatively small balance sheets, they were heavily dependent on the mortgage market, and they relied heavily on the repurchase market, most often used as a short-term financing tool.
Richard Fuld Jr., Lehmans famously intense leader, who flew back from India over the weekend, says Lehman has studied the past and is in good shape today, with a comfortable level of funding, or liquidity.
“We learned a ton in 98,” Fuld said. “We have a much different liquidity profile today than we did then.” Fuld was referring to investors panic after Russia defaulted on its debt, pushing a big hedge fund, Long Term Capital Management, to the precipice. The Wall Street bailout of that fund proved to be the nadir in that financial crisis of nearly a decade ago.
“Ninety-eight was pretty ugly for us,” Fuld said. “This is uglier for the system - its more pervasive and more global.”
Lehman was not the only financial stock hit hard on Monday. MF Global, a large global commodities broker, dropped 65 percent, while Washington Mutual fell 12.8 percent, and Morgan Stanley closed down 8 percent. The Amex broker-dealer index fell 10.3 percent.
Shares of many other financial institutions followed Lehmans shares down on Monday, but JPMorgan rose $3.77, or 10.3 percent, to $40.31. That helped support the Dow Jones industrial average, which rose 21.16, or 0.18 percent, to 11,972.25.
According to an analysis by Buckingham Research Associates, an independent research firm, Lehman has $169.8 billion in total liquidity, comparable to $168.6 billion at Goldman Sachs and a considerable step up from the $35.3 billion at Bear Stearns. In an examination of all the major brokers over the weekend, Buckingham concluded that Lehman, though the smallest firm on Wall Street, has the highest percentage of liquidity (25 percent) of total assets, suggesting a strong cushion.
According to the firms securities filings, Lehman has $35 billion in cash and liquid assets and $160 billion in unencumbered assets - like loans and securities backed by commercial mortgages that it can use as collateral to borrow more, should it desire.
Lehmans doubters are not convinced, citing several issues. Recent concerns about financing essentially amount to a question of confidence. Lehmans management is battling that issue by being far more aggressive in talking about its financial strength than it did a decade ago.
The skeptics point to the rapid growth of Lehmans Level 3 assets - those that the firm says have no “observable” market value. Those assets more than doubled in the last six months of last year, rising to $42 billion.
Other areas for concern include Lehmans $39 billion in commercial real estate assets and $37 billion more in residential mortgages, businesses that have been hammered this year. If the moves in the real estate indexes were applied to the firms totals, Lehman would take an estimated hit of $5 billion to $6 billion. (Lehmans critics declined to be identified because hedge funds that short a companys stock are often accused of profiting from another companys pain.)
Lehman has argued in the past that it saw the mortgage crisis coming and hedged effectively against some of the downturn.
Fuld, who is often referred to as “the warrior” or “the survivor,” is not shying from skeptical markets. Having admitted he made a mistake by ignoring market rumors in 1998, he made a public statement on Monday.
“The Federal Reserves decision to create a lending facility for primary dealers and permit a broad range of investment-grade securities to serve as collateral improves the liquidity picture,” he said, and “from my perspective, takes the liquidity issue for the entire industry off the table.”
