Lehman’s survival as an independent firm looks increasingly in doubt, yet the shape of an end game is not yet clear, although, per T.S. Eliot, it likely to conclude with a whimper.
The market’s reaction to Lehman’s way worse than expected earnings announcement of $3.9 billion in loses due to $5.6 billion in writedowns was ugly, but even uglier is the lack of much (any?) progress towards getting the firm out of its fix. Yes, dividends are being cut, but the other two key elements, spinning off much of the troubled commercial real estate portfolio to shareholders and selling (well, sort of, as we will discuss) its asset management business.
But what would be left? A firm shorn of its best asset, now even more heavily skewed toward fixed income, which by all appearances is suffering not only a cyclical but also a secular decline. The private securitization market is much smaller than it used to be and does not appear likely to return to its former size for a very long time. if ever.
The new (or rather, more openly discussed theme) was can and should Fuld survive? Both the Wall Street Journal and the New York Times have reports on that topic, never a good sign. However, who would take his job? He may remain in place by default if the board is able to box him around the ears.
From the Times:
“I think it’s possible he could be pushed out any day,” said William T. Fitzpatrick, an equity analyst with Optique Capital Management. “You’ve got a stock that’s basically in free fall.”
Lehman executives insist they and the company’s board stand behind Mr. Fuld, who has pulled Lehman back from the brink time and again. But Mr. Fuld has been slow to sell troubled assets and secure the financial lifeline many analysts say Lehman needs, steps that become more difficult every time Lehman’s stock falls further.
The Wall Street Journal tells us:
Mr. Fuld has presided over a stock decline of nearly 90% this yea…Investors are growing increasingly frustrated…
During his 14 years at the helm of Lehman, the former bond trader has built a reputation for driving hard deals and guarding the independence of the company that he has run like a close-knit family. But those who have negotiated with Mr. Fuld in recent months say he may have played his hand too aggressively — holding out hopes that his firm was buffered from continuing pain on the market, and seeking better deals from would-be investors only to see potential partners walk away.
Critics say the 6-year-old Mr. Fuld has been unable to take the steps necessary to shore up the ailing Wall Street giant. Amid the housing bust, they say, he has refused to drastically mark down the value of his firm’s massive real-estate holdings. Mr. Fuld waited to raise capital until after many of his rivals. These critics say he has believed, mistakenly they say, that his access for the past six months to Federal Reserve bank-lending facilities would buffer the firm from continuing pain.
The Journal story has some good reporting on how Fuld’s pushing for the best deal and impatience undid some possible deals.
Bloomberg tells us Lehman’s fate hinges on the sale of a stake its asset management unit, But the story contends Fuld is overplaying his hand:
“Fuld doesn’t want to let it go,” said Bruce Foerster, a former Lehman executive who is president of South Beach Capital Markets in Miami. “He went out of his way to buy it and he knows it’s a good asset.”…
Even a successful sale may not be enough to satisfy credit- rating companies. Moody’s Investors Service said it was reviewing its ratings for Lehman, and may lower them if the firm fails to reach a “strategic arrangement.”
The Telegraph, states in its headline what is becoming obvous: “Embattled Lehman Brothers regroups to ready itself for sale “:
Lehman Brothers effectively put itself up for sale yesterday alongside a last-ditch restructuring to stem the collapse in its shares..
However, his [Fuld’s] plan was overshadowed by the admission that Lehman’s “is committed to examining all strategic alternatives to maximise shareholder value”. Such phrasing is banker-speak for “up for sale”, and at least one senior banking source suggested that Lehman’s aim in restructuring its operations could be part of a cleansing process designed to make it more attractive to potential buyers
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Re: “dividends are being cut”
That is actually a positive for insiders that have option grants, because dividends dilute option grants, hence, as shareholders and regulators ignore the accounting anomalies related to the billions of lost shareholder equity, insiders will benefit, while shareholders continue to hold a bigger bag, filled with less loot … too bad suckers!
One would think so.
I quote: “the 6-year-old Mr. Fuld”. I think that this is rather young to be CEO of a major financial firm.
re 6-year old. I’d say about the right level of judgement and maturity, by most counts.
Just a reminder. The 2007 Lehman bonus pool was
9.7 billion. Too bad they bought all those Hamptons beach houses and Manhattan condos. They could have
bought themselves…….Lehman Brothers.
Fuld is really hammering those shorts. Citi the last defender on the Street cut their target to 9 from 35. Thanks for the heads up. Now why is Ful still on the NY Fed.
Yves,
A thought on the broader implications of Lehman:
Consensus is that the Fed/Treasury will allow the common stock of Lehman to go to zero but bail out creditors — the same model as Bear, F&F, etc.
The model has unintended consequences. By wiping out common, Treasury is raising the equity risk premium for all financials. This, in turn, is making it harder for financials to recapitalize. No recap's means Treasury has to intervene more often, which wipes out more common, which raises the risk premium. An adverse feedback loop.
By trying to "ring fence" the debt part of bank balance sheets, Treasury is causing banks to fail. Who in their right mind wants to invest in high-risk equity when they can buy no-risk debt?
It’s true that forcing debt holders to take some sort of haircut on these deals is the missing element to reduce/eliminate the moral hazard issue.
However, more losses on the debt side are just as likely to start a cascade effect BK’ing a number of other firms as they are to spread the pain equitably.
As I see it today, it’s the CDS problem that rules the decision making process — a la the FNM and FRE CDS neutralization play.
fwiw, hearing from LEH employees that they’ve been told by mgmt to expect the end to come in next 24-48 hours. GS is apparently a willing buyer (at nominal price), but LEH would prefer to sell to someone else, b/c GS would cut virtually the entire equities and I-banking business.
In 2006, Fuld was named #1 CEO in the Brokers & Asset Managers category, by Institutional Investor magazine.
Fuld serves on the board of directors of the Federal Reserve Bank of New York and is a member of the International Business Council of the World Economic Forum and the Business Council. He also serves on the Board of Trustees of Middlebury College and New York-Presbyterian Hospital, as well as on the board of directors of the Robin Hood Foundation.
I see no reason that taxpayers shouldnt bail out Fuld and keep his options fully protected. We need to save people like this as we rebuild the banking industry! This is God’s plan!
This is an interesting departure from what I heard last night and this morning on CNBC.
The near consensus view there, including Kudlow, was that Lehman would do just fine. That maybe even the Feds would step in, a la Bear Stearns.
Did someone mention…Kudlow? Guess he is back on the white pony again if he thinks Lb is going to do fine. Btw, I think he has a great personality, and used to be a smart economist, but he is now a regular shill (sp?)… .
Yves please post comments latest first
you’re like a non-technical friend who had her Inbox Hotmail default organized latest – last, had xxxx msgs and scrolled to the bottom all the time to read her latest mail
How convenient that after a week orchestrated by Paulson, only Goldman and Morgan remain intact. Guess Morgan owes its fate to the fact that it would’ve have just been too obvious if Goldman was the sole survivor. It pays to have friends in the right places!