Will Lehman Follow Bear into the Woods?

Lehman Brothers (LEH) was very weak Friday as speculation grew that they would be the next domino - I feared for what would happen to them Monday but thought last night's Fed moves might give them a stay of execution. The market seems to disagree, pushing the shares down 40% today (they were down lower earlier). Pure crisis.

If Lehman goes, than there are only 3 investment banks left and Merrill Lynch (MER) is not in good shape as they were one of the center pieces of the whole mess. Their new CEO, John Thain, has a ton of respect on The Street so I am guessing that must be the reason the stock is not being pole axed further. I opined at the turn of the year that I could see investment banks being a good investment in the 2nd half of 2008 after all the cockroaches that at the time people were saying did not exist came to light, but will there be anyone left but Goldman Sachs (GS) at this point? Sheesh. They are going to have all the investment banking business to themselves at this rate. I keep repeating these are truly unprecedented times....



But back to Lehman...

• Lehman Brothers shares fell to a six-year low as Wall Street, leading the decline among financial stocks, as investors wondered whether the firm might be the next domino to fall in the banking meltdown.
• The drop in Lehman's shares was accompanied by options activity that showed investors were perceiving heightened risk for Lehman's stock and an increased likelihood of a decline in its value.
• Earlier Monday, CNBC learned Chief Executive Dick Fuld sought to calm Lehman employees by sending out an email telling them that the Fed's action to open its discount rate window to primary brokers has taken the liquidity issue "off the table for the entire industry." However, investors clearly were not soothed by his words. Lehman has higher exposure to mortgages and mortgage-backed accounts than Bear Stearns.
• Option traders were buying more than three-times the number of puts than calls, a sign that traders expect the value of Lehman shares to fall, according to Rebecca Engmann Darst.
• Analysts at Deutsche Bank sent an alert to their clients saying, "Lehman is not Bear." They cited Lehman's higher levels of liquidity, the support it has from its counterparties, its higher level of diversification, and the experience of Lehman's CEO as reasons for its opinion.
• But it said Lehman's exposure to commercial and residential real estate, and to a lesser degree leveraged loans, will likely burden earnings at least for the next several quarters.

Amazing what the power of rumors is doing in this market. Some powerful hedge funds who have the ears of journalists must be making some huge dollars in this era, simply by betting short and starting worst case scenario rumors. Anything to make a buck... not that they'd do anything like that (ahem).

Disclosure: No positions

Comments

[crashof2008:]

This isn't going to be easy.

I am filming a documentary entitled "The Crash of 2008". Portions of
what will be used in parts of the film are now available at:

www.youtube.com/user/C...

I was a market maker in derivative securities and have read hundreds of
research papers published by individual Federal Reserve branches. I
found the most informative ones to be from Kansas City and Atlanta.

Additionally, I have reviewed scores of research papers by various
Federal Reserve branches prior to publication.

Matt Dubuque
The Crash of 2008

2008 Mar 18 12:21 AM

[Manifestor:]

The article's last paragraph, to quote again,

"Amazing what the power of rumors is doing in this market. Some powerful hedge funds who have the ears of journalists must be making some huge dollars in this era, simply by betting short and starting worst case scenario rumors. Anything to make a buck... not that they'd do anything like that (ahem)" ...

summarizes it all very beautifully. I would add internet bloggers in addition to the journalists mentioned in the above quote.

Do you think the relaxation of the uptick rule for Shorts made it easier?

2008 Mar 18 12:35 AM

[TraderMark:]

Manifestor - I've never gotten a great explanation on why that rule was abolished. What was so hurtful about it? Why was it so urgent to get rid of it? We have so many issues in the securities market, and they focused on that as a top priority? I never saw a great explanation of "why".

2008 Mar 18 10:02 AM