When employees of Lehman Brothers walk out the office of the fourth largest investment bank on Wall Street, they are greeted by reporters and camera flash lights. An employee of Lehman Brothers said that its like the reporters are there waiting to see how Lehman Brothers collapse.
On 9 September 2008, Lehman Brothers shares closed at 7.79 USD down 44.95% from a day ago's closing price of 14.15 USD, the largest drop in a day for the company's share price history. News before this was that the talks between Lehman Brothers and South Korean Korea Development Bank (KDB) was not successful. This worries the market and the gains due to the bailout news of Freddie and Fannie were all returned back to the market.
After market close, Lehman Brothers announced that it will release its 3Q financial report a week earlier on 10 September 2008 morning US eastern time and also a series of "Strategic Initiatives".
From the Lehman Brothers 3Q financial report, it shows that Lehman Brothers made a loss of about 3.9 billion USD, or 5.92 USD per share, higher than expected. Asset write down amounted up to 7.8 billion USD, after hedging, it still pose a figure of about 5.6 billion USD.
Lehman Brothers also announced some self-help measures. It will largely reduce its Mortage Backed Securities (MBS), commercial properties and other low liquidity assets. In 2009, it will transfer its commercial properties into its subsidiary Real Estate Investments Global (REI Global). It will also sell most of the shares of one of the department and lastly reduce dividends payout to 5 US cents per share.
Sales Talk
Recently news about Lehman Brothers seeking to sell part of its shares and subsidiary businesses have been popping around in the market. The news that have the biggest impact on investors was the sale of part of its shares to KDB.
Last week KDB spokesman Sung Joo-young announced that KDB did have talks with Lehman Brothers to buy 25% of its shares and mentioned that the amount could be up to 5.2 billion USD. This news injected some level of confidence into the market and Lehman Brothers share price even stood above 17 USD at one time.
However, the KDB talks with Lehman Brothers was very not going on very well. Jun Kwang-woo, chairman of the Financial Services Commission said that due to the financial market's situation globally, the South Korean banking industry should cautiously consider the buying of stakes in Lehman Brothers.
In South Korea, the mood is that there are no consensus on the selling price prposed by Lehman Brothers CEO Richard Fuld. A South Korean newspaper report on Wednesday was quoting from an anonymous high South Korean authority that due to the global financial situation and the South Korean banking industry environment, and also the price quoted by Lehman Brothers, the talks between KDB and Lehman Brothers are most likely going to fail.
On 9 September 2008, Lehman Brothers share price dropped 44.95%, testing the lowest price reached in 10 years. Market analysts says that the mass dumping has got to do with the failure of the talks between KDB and Lehman Brothers.
On the news conference on 10 September 2008, Lehman Brothers CFO Ian Lowitt points out that the company will try its best to sell and reduce its MBS and commercial property related assets, and to strip away its commercial properties and put it into REI Global in order to clean up the company's balance sheets.
Hedge fund Highbridge energy asset management director says that from the current situation, is it quite impossible that Lehman Brothers is able to get out from the MBS market. He has worked in the middle management in Lehman Brothers before and is relatively familiar with Lehman Brothers business ongoings. He thinks that because the MBS problem is too big for Lehman Brothers. The only way to help with the situation is to have a good deal.
Rumours before this says that Lehman Brothers intends to sell its investment management department Neuberger Berman. On Tuesday CNBC quoted from sources that says Lehman Brothers top mangement has arranged talks with buyers. But the highest bidding price was only 2 billion USD, much lower than the estimated price Lehman Brothers has for Neuberger Berman.
Neuberger Berman was referred to as its 'pearl' by Lehman Brothers. Since bought over in 1995 by Lehman Brothers, its business has been growing. To sell it is considered a signal that Lehman Brothers encountered problems getting financing.
Hedge fund Highbridge energy asset management director says that Neuberger is a piece in Lehman Brothers that will affect its pricing. To sell away Neuberger is like amputating away an arm or leg to save its life, ie, selling the best asset in order to get financing to alleviate the bad financial situation that Lehman Brothers is in.
Before this, BlackRock, Carlyle Group, Hellman & Friedman and other various others were pointing out that they have interest in buying Neuberger. However, till date we are not seeing any deals appearing. The steep drop in price of Lehman Brothers share deals another blow to investors confidence which makes it more difficult for Lehman Brothers to sell its shares at a more better price.
Ian Lowitt on 10 Septembet 2008 news conference says that Lehman Brothers is seeking to sell part of the share holdings of Neuberger Berman and will announce the details once any deals are done.
Adding More Stress to the MBS Market
Hedge fund Highbridge energy asset management director says that the problem with Lehman Brothers lies in its MBS related assets. Lehman Brothers commodity futures business, stock related business and its traditional fixed income business are doing quite well. However, the company was too aggressive in its business in the recent few years which left it with a 65 billion USD MBS related asset bill and leveraged loans of about 10 billion USD. Lehman Brothers market value was only about 5.3 billion, which is only a small fraction of the MBS and leverage loans assets.
Now that the MBS market is very bad and with leverage in Lehman Brothers MBS related assets, if it were to write down, reducing 10% will cause it to loose nearly 10 billion USD, this will be worth more than the current overall market value of its shares. So if Lehman Brothers were to do further write downs, it may follow the foot steps of Bear Stearns.
On 9 September 2008, Lehman Brothers interest difference between its Credit Default Swaps (CDS) and its bonds has reached 120 basis points to reach 440 basis points, making a new high record. But the difference from Bear Stearns is that the 3 largest investment banks, Goldman Sachs, Morgan Stanley and Merrill Lynch says that they will not stop its trading with Lehman Brothers. Bear Stearns price plummeted after Goldman Sachs sends out a notice saying that it will stop trading with Bear Stearns.
Because of the large MBS related assets, if Lehman Brothers is to go bankrupt, it will need to clear off all of them. The large amount of the MBS related assets by Lehman Brothers will add more pressure to the already battered MBS market. Now that the US government has stepped in to help Freddie and Fannie in order to support the liquidity of the MBS market, with Lehman Brothers going bust, it will add on more costs for the US government to save the MBS market.
Watching Wall Streets few big investment banks, Bear Stearns has went down, now Lehman Brothers may be next, followed by maybe Merrill Lynch. This looks like a domino game. The US government has stepped in to help Freddie and Fannie to help stabalize and boost market confidence, but if Lehman Brothers were to go under, it will be another big blow to market confidence.
But hedge fund Highbridge energy asset management director says that Lehman Brothers may have a good way out and not go bankrupt. Ian Lowitt at the news conference says that after the the various measures are able to be implemented, Lehman Brothers balance sheets in 2009 will be clean and bright.
Latest Updates
15 September 2008
- Lehman files for bankruptcy protection
Lehman on Monday filed for Chapter 11 bankruptcy protection, ending the 158-year-old Wall Street firm's run and rattling the foundation of the global financial system.
Lehman said that it will continue business while it explores the sale of its broker and investment-management units and other strategic alternatives.
No comments:
Post a Comment