Will Lehman crash and burn?
Posted
Jun 05 2008, 05:50 PM
by
Matt Koppenheffer
Rating:
Are we going to get an encore showing of "The Amazing Disappearing Investment Bank?" Now that Bear Stearns is no more, the banking bears and short sellers have turned their attention to fellow investment bank Lehman Brothers.
With the massive leverage ratios that the investment banks have propped themselves on, creditor confidence has become a prized asset -- maybe the prized asset. There was plenty that was going haywire over at Bear, but it ended up being a complete and rapid drying up of the firm's liquidity that finally pulled the rug out. Unfortunately, Bear's management didn't seem to grasp the potential of this happening and their response to liquidity questions was a flip "Liquidity? Oh don't worry, we're just fine."
As the saga continues to unfold we'll see how much Lehman learned from Bear, and whether it's enough for them to keep the liquidity flowing, but the firm certainly seems to be taking the pessimists on head first. Lehman raised new capital back in April, but did so with preferred shares that couldn't be shorted. More recently, as rumors swirled that the company would be raising more cash, it thumbed its nose at shorts and bought back shares instead. The financial media has also gotten wind of deleveraging at Lehman through whispers and leaked memos from the company.
But the short sellers are stubborn. Trying to pick apart the financial position of the firm is nearly impossible for an outsider, but chief critic David Einhorn of Greenlight Capital has made a pretty compelling case by highlighting some questionable areas of Lehman's last quarter and arguing that it should have seen much worse write-downs on its CDO holdings. Multiple bloggers, including Barry Ritholtz and Yves Smith, have also questioned whether Lehman is intentionally leaking information -- which should be drawing the ire of the SEC. And disclosure rules aside, they also argue, what does it say about how Lehman management is feeling if this cloak and dagger information exchange seems appropriate?
Don't go to The Motley Fool's CAPS community expecting a sunnier take either. The stock is rated a rock bottom one star there and many community members are looking for blood. Just today MarketBottom jumped in the scrum with an underperform rating on Lehman saying "The giant derivative laced scheme has now started to unwind and the fallout from this has only started. Desperation is now being added to previous bad judgment."
CAPS All-Star TMFWBuffettJr was of the same mind when he put his thumb down on Lehman back in February:
Warren Buffett warned that the problem with such a fantastic party like we had at Cinderella's mortgage ball over the last five years is that there are no clocks on the wall. He said the drinks taste a little better, the girls get a little prettier, and so you stay for just one more dance. But eventually midnight hits and everything turns back to pumpkins and mice. Lehman is caught holding a lot of pumpkins and mice, they're just trying to hide it a little while longer than everyone else.
My take is that the opacity of Lehman makes it extraordinarily tough to figure out whether this stock is a victim of irrational fear or a ticking time bomb. So I'm not shorting it and I'm not buying it -- instead, I'm keeping my distance and getting ready to duck and cover should it end up blowing.
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