Friday, July 18, 2008

Is Lehman Next?

"Sometimes, when you really mess up, it is good to admit you erred. Unfortunately, no one seems to have gotten that message through to Lehman Brothers, the embattled brokerage house that is now fighting to pursuade the financial markets that it will not be the next Bear Stearns. This week it raised $6 billion in new capital, at the same time it disclosed a $2.8 billion loss in the quarter that ended last month. ... But what is clear is that Lehman's strategy, as the subprime mortgage crisis unfolded and expanded, was to seek to differentiate itself as being so well managed that it would not have the problems other firms might have. Its policy on share buybacks was to avoid the dilution caused by grants of restricted shares and options issued to employees, and that meant it bought back about as many shares as it issued. ... In the 13 quarters from the end of [2004] through this year's first quarter--that is, before the new $2.8 billion loss--Lehman reported net income of $11.9 billion and spent $11.8 billion on share repurchases. ... Even if we assume that the company will get the higher conversion price [$33.04], Lehman will have reaped $6 billion by issuing 203.4 million shares. That does not compare faforably with its share buybacks over the past 13 quarters, when it spent nearly twice as much to buy 189.5 million shares. It paid an average price of $62.19 for shares that dropped under $23 after the shake-up was announced. ... There are prominent short sellers who have made clear they think Lehman has not marked its securities down as far as it should", Floyd Norris, NYT, 13 June 2008 at

"The 66% plunge in Lehman Brothers Holdings Inc.'s stock price so far this year has taken a toll on the net worth and pride of the Wall Street firm's roughly 26,000 employees around the world. But in an unusual move to reward employees who are fighting to steady the firm amid mortgage-related woes, Lehman announced that most employees will be awarded mid-year stock bonuses. ... Wednesday's move also is Lehman's attempt to take advantage of its stock price, which fell Monday to its lowest since 2000. The battered price of the shares means more stock than usual will wind up in the hands of employees, typically paid through a combination of cash and shares. ... Lehman shares surged, with investors seeing the awards as another sign of Mr. Fuld's insistence that Lehman can prosper as an independent company, suggesting it won't sell at a rock-bottom price. Lehman stock rose $1.40, or 6.7%, to $22.36 on the New York Stock Exchange", my emphasis, Susanne Craig (SC) at the WSJ, 3 July 2008.

"At this point in the Lurches of Lehman, we aren't certain whether chief executive Dick Fuld will become Wall Street's latest human sacrifice or whether the firm itself will survive or in what form. ... When you look at Fuld's compensation package, you have to laugh at the idea that giving CEOs big slugs of equity aligns their interests with those of regular shareholders. Lehman's stock was down 60% for the year as Fortune went to press, but Fuld hasn't been asked to return a single penny that he's made from selling stock he received as compensation. By Fortune's count, Fuld, a bond trader turned CEO, has realized almost half-a-billion dollars from cashing in stock options and restricted stock awards since Lehman went public in 1994. ... By our calculation, which Lehman declined to discuss, Fuld has knocked down $489.7 million (before taxes) from selling 14.1 million optioned and restricted shares. (He seems to have kept 2.7 million). ... Lehman won't fail, but its stock ain't necessarily a bargain", Allan Sloan (AS) at Fortune, 7 July 2008.

"It's apparent that such notables as J.P.Morgan's James Dimon and Lehman's Richard Fuld [RF], as directors of the New York [Fed], will make decisions which will benefit their companies and themselves. ... [RF] was quoted by the Financial Times of London of June 4, 2008, with having made the following remarkable statement: 'The federal reserve's decision earlier this year to lend directly to investment banks should take questions about Lehman's liquidity off the table.' Let's analyse this statement a bit. The ... 'decision' ... is a reference to the 'primary' facility extended to Bear Stearns [BS] of $25 billion, which turned out to be part of the loans in effect made to J.P. Morgan of $55 billion. This is so because [BS] no longer exists and the loans are to J.P.Morgan now, $29 billion of which is non-recourse. ... [RF] does not say that questions of Lehman's liquidity are off the table because of the soundness of their present assets, liabilities and cash. He says the liquidity questions are 'off the table' only because of Lehman's expectations of being treated at least as well as J.P.Morgan by the New York [Fed] when and if Lehman demands bankers welfare (i.e. dole) payments from the FED and ultimately from the tax payers. ... Fuld suggests that if Lehman comes calling for a $50 billion loan from the FED offering dubious mortgages which Lehman values at $50 billion, he can assure Lehman and the public that Lehman will get the money because Lehman's illiquidity is off the table. ... [BS] CEO Schwartz was not on the NY FED Board. In fact no one from [BS] is on the Board. ... If [RF] approves a loan from the [NY Fed] to Lehman which he certainly indicated he would do, then he violates Title 18 section 208. And it can not be any clearer", John Olagues (JL) at, 8 June 2008.

Borrowing from the Mogambu Guru, "Hahahahahaha", Lehman (LEH-NYSE)! LEH must be run by a bunch of ignorant accountants. Why should LEH care if employee share issuances are "dilutive"? LEH's concern should not have been EPS, but was LEH stock over or underpriced. LEH shows the efficient market's hypothesis at work, i.e., its management hasn't a clue what LEH is worth. Imagine, people and companies ask LEH for financial advice! Hahahahaha!

I spin this story differently from SC. I think LEH's issuing employees stock in lieu of cash and stock shows LEH is trying to save cash. If LEH is cheap at $22.85, I expect many SEC Form 4s to be filed, by LEH's senior management buying lots of LEH. LEH's 2008 Proxy Statement, available at www.lehman/com/shareholder/proxy shows Richard Fuld (RF) "owns" 10,851,590 shares of which 1,800,000 "may be acquired within 60 days of January 31, 2008". RF's 30 November 2007 SEC Form 5 , at, shows he owned 3,298,578 shares, including GRAT shares. Hey, RF, show LEH you care. Buy say 10 million shares in the open market. It's only $166.5 million. You're a wealthy man. Show us LEH is worth at least $16.65.

Thank you AS. RF is a good stock trader, he sold 14.4 million shares of LEH at an average price of $34.63 ($489.7 / 14.1). Let's see how much he buys now.

Suppose RF recuses himself from a Fed vote to extend LEH credit? So? Will the other Fed heads let LEH crumble, or save it at the taxpayer's expense, or in the knowledge that each in turn, will "recuse" himself at the appropriate time, approve it? Repeal the Federal Reserve Act. Now!


henry said...

Are the bond rating agencies (Moody's and Standard and Poors) and the Lehman CPA's responsible for the high rating accorded Lehman and overrating the Lehman Brothers balance sheet?

Independent Accountant said...

I think you are asking me two questions.
1. Were Lehman's books cooked? My answer: very likely. Ernst & Young (E&Y), LEH's CPAs signed LEH's opinion on 28 January 2008. There was no going concern comment in it. LEH reported positive equity and earnings as of and for the year ended 30 November 2007. To answer you definitively, I would have to audit LEH myself based upon what was known or knowable as of E&Y's opinion date. LEH's proxy statement shows it paid E&Y $31 million during 2007. It begs the question: for what?
2. As to the rating agencies, as I have written in other contexts, their ratings are worthless. They should be put out of investors misery. I would have to check the history of LEH's ratings to answer this one, but suspect by the time LEH was downgraded, the downgrade was too late to do investors any good. Just like the history of Enron. I'll see what I can find about the history of LEH's ratings and if I have anything to add.

Independent Accountant said...

To follow up on the LEH downgrades. I went on google to see when they came. Moody's cut LEH to A on 2 June 2008. Fitch cut LEH to D on 15 September 2008, after LEH said it would file for bankruptcy. Who needs these guys? Yes, I think LEH's ratings were absurd. I thought LEH was on death's door months ago.