This brings me to Lehman Brothers (LEH). Lehman Brothers had the second highest levels of toxic ABS/MBS securities on their books after Bear, each bank having twice as much relative to total assets as Goldman and Merrill. They were down 14% Friday as Bear collapsed. I think it's likely that the street will now turn their attention toward LEH as the next pin to possibly fall. In addition, although Bear went donuts over the weekend they closed Friday with a price/book of 0.7. LEH closed with a price to book of 1.15. If the market truly panics over LEH it could have a serious fall.
I have been extremely bearish on the financials for some time now, but I think this Bear situation creates a short-term opportunity to take advantage of the current fears in the market .
Since we are on the topic I thought it would be interesting to note that in January of 2007 Bear's stock was trading close to $170/share. That valued now ex- CEO and chairman Jimmy Cayne's holdings of Bear Stock at right around $1Billion. In a year and two months Cayne's position has been wiped out. Don't feel too sorry for him though. He played bridge and golf throughout this summer as two hedge funds blew up and the market began to panic. He also just closed on a $26 million condo in Manhattan, paying in cash.
1:00AM - 3/17/08 - Update - From the RGE Monitor on Lehman:
- WSJ: Lehman's liqudity position stronger than BS was but weaker than other peers. Lehman learned lesson from 1998 liquidity crunch: less reliance on short-term funding.
- Cumberland: Main difference to BS: Lehman generated over 60% of their revenues outside the U.S. in Q4 2007.
- Bloomberg: March 14: Lehman Brothers, largest mortgage underwriter in U.S., obtained a $2 billion, unsecured, three-year credit line from 40 banks. "The unsecured facility replaces an existing credit line"; JPMorgan and Citigroup led the effort.
- Reuters: CDS spreads spiked to 465bp after Bear announcement, most among investment banks.
- Fitch (via RGE): At the beginning of the turmoil Bear Stearns had the highest toxic waste ("residual balance") exposure as percent of adjusted equity on balance sheet: BSC = 54.5%; LEH = 53.3%; GS = 21%; MER = 17.8%; MS = 8.3%.
- Fahey (Fitch): Lehman Brothers reported Level 3 assets-to-equity of 1.68x in 3Q07 (BSC 1.56; GS 1.84; MER 0.70; MS 2.74: gross notional Level 3 asset value, not netted with derivatives hedges in Level 1 or 2 as reported by other banks)
- Hedges on Level 3 assets (i.e. "short their own instruments") produced book gains of $750m at Lehman (largest amount among 5 brokers) but Fitch decided that gains from credit spread widening will not be considered in evaluating operating performance
--> Gains from structured notes spread widening as percentage of pre tax earnings was 62% at Lehman in Q3; 129% at BS; 7% at GS; -17% at ML; 17% at MS.
