Richard X. Bove on Lehman: An Assault on Reason 17 comments
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Ladenbrug Thalman's Richard X. Bove stirred the market on Friday by speculating on the attractiveness of Lehman (LEH) as a target for an hostile take over.
“If one assumes that the Neuberger Berman subsidiary is worth somewhere between $9 to $13 billion, the rest of the company is being valued at less than zero. A valuation of this nature would only make sense if the company were to go out of business and then still owe money to its creditors, which of course could not happen. Once it is bankrupt, it is bankrupt.”
“A deep pocket buyer would not be under any pressure to sell any assets. It could wait until they mature. It could sell Neuberger for more than the value of the whole company and basically own Lehman Brothers for nothing.”
Richard X. Bove, 8/21/2008
Hum? Really? How would a buyer of Lehman get their money back? Dividend out the proceeds of the Neuberger sale? Then why not actually sell all $600 billion worth of assets on the balance sheet? The company then goes bankrupt, and “once it is bankrupt it is bankrupt”. Just walk away with $600 billion…
This of course could not be. Mr. Bove’s latest report is an assault on reason and illustrates well the widespread lack of analytical rigor (and in some cases intellectual honesty) with the sell side research community.
If any buyer of Lehman were to emerge, buy Lehman and quickly sell the Neuberger division as Mr. Bove suggests, they would not be able to get their hands on the proceeds of the sale; the money would need to be left in the company to support the coming losses of Lehman’s balance sheet. If the losses persist, the buyer might need to decide between throwing more good money after bad, or instead throw in the towel and file for bankruptcy, losing all their original investment and probably face lawsuits and a gigantic legal bill. What is free about that?
Has Mr. Bove ever heard of the concept of “Fraudulent Conveyance”?
If you sell assets of an insolvent company, upon a filing the Bankruptcy judge can null the transaction and throw it back into the bankruptcy estate. Any sale made within a 6 month period (non-limiting) prior to a filing is automatically considered to be under a “suspicion period”
In fact, I think this may well be one of several key concerns making difficult from a legal liability perspective, the sale of Lehman’s non-toxic assets like the asset management business.
Mr. Bove thinks the shares are so cheap that the stage is set for a hostile take over battle. If the shares are such a bargain, why isn’t CEO Dick Fuld committing a substantial percentage of his net worth to buying the firm’s stock?
Please tell us Mr. Bove, who would be the actors in this battle? The New Jersey investments division (who has already lost 50% of their investment in Lehman a couple of months ago) and the Korean Development Bank?
I’m not betting on that.
Disclosure: Short LEH
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This article has 17 comments:
As a result, Fuld is likely prevented from trading given the material circumstances surrounding the company.
HOWEVER, I would believe that if he really really wanted to make a statement by purchasing more LEH, he could get a waiver and approval from the SEC. But keep in mind, he already has a substantial value of LEH stock at risk already.
You see buddy, that's what the smart players are going to do. They are not going to let hysterical flibberdigibbits like yourself force stressed sales into an irrational market. They are going to buy for pennies on the dollar and work the assets out for many multiples of their purchase price. That's the nice thing about having tons of $$ in a crisis. And it's "lose" not "loose."
Bove is quite intelligent, your non-analysis does not come close to refuting his position.
Koreans are smart. They walked away. When level III assets are wriiten UP, consider buying. When a company raises capital to fund growth, consider buying, as Meredith Whitney says. When they raise capital solely to cover losses, in an industry that has been extremely profitable for years, BEWARE.
He admitted he made the LEH $20 estimate based on current stock price plus a 50% premium. Very intelligent.
Listen geniuses, in the Great Depression 1/2 of all mortgages were delinquent. Now it's what, 1%?? Now the securitization of the junk, and option arm loans, etc., are gonna cause a lot of pain, but would you stop it already like this is the end of the world.
Guess what, it's not. And nor is Lehman insolvent. ABX is predicting over 100% rates of default, is that likely?? All the town criers late to the game have read a couple of blogs and think they can predict the end of the world.
First, it's subprime. That's done, been written down almost completely. Then, it's high oil, guess what, coming back. Then FNM and FRE, bailed out. WB and WM may be done. boo hoo. It'll be a forced marriage of types.
Let me tell you, if BAC and swallow up CFC without choking, WM and WB should be a walk in the park. JMHO.
But the chicken littles lack both perspective and understanding, in my opinion. And this author has provided no detailed analysis of LEH other than to tangentially mention fraudulent conveyances.
It might make more sense to short stocks once the administration changes in January.
Clark Jenkins
FishGoneBad.com
During the Depression, a much lower percentage of wealth was locked up in home ownership than today, so the mortgage default rate, climbing, is now more significant.
Of course the world won't end if every Wall Street institution went bankrupt tomorrow. Might not be so bad.
But shorts can just say whatever they feel right?
The rumour of some sort of rescue out of Korea that set off the rollicking rally on Friday, have turned out to be totally unfounded. Gee what a surprise! Ahhhh, I love the smell of market manipulation in the morning.
And then he concludes with the brilliant thought why doesn't Fuld by more stock himself. This author is truly a thinker.
And I said "if" BAC doesn't choke. Who knows if they can handle it, I think they likely can. New housing bill will be a huge help.
Thank so much for your comments. Indeed the goal fo the article was not to analyse Lehman's solvency and much less the end of the world (I am of the view that financials hit bottom 7/15), the objectve was simply to point out the flawed argument (I would lamost qualify it as a non-sequitor) in the article.
You cannot separate the good businesses from the bad businesses realize the value fo the good ones and leave your creditors hanging on to the bad ones.
There may even be a buyer out there for Lehman, but to say that there will be hostile take over battle with two or more contenders under current conditions is non sensical IMO.
This is much different than BSC. Therefore, they do not necessarily have to liquidate very solid assets at below fire-sale prices. LEH's mortgage book is supposed to be much better than most on the street. Perhaps that's not saying much, but they do have very solid assets with which to work with.
I think that perhaps a well-capitalized institution that can handle some of LEH's junk could make a great deal to try and snap up some of LEH's valuable assets and just hold on to the rest. Obviously, I agree that they couldn't just sell the good ones and not be on the hook for the rest, but at current valuations I think the idea of being the "savior" is not a bad one for entry into one of the IBs. In other words, I think that LEH's book is likely manageable by an institution with solid capital.
I am not as optimistic that July 15th was the bottom for financials, but I hope that you are right. I would also refer you to DoubleAA's comment regarding Fuld purchasing shares. Let's just say that when you're trying to shop the company it is a very difficult legal situation as an insider to purchase shares. Cheers.