For a Lehman Signal, Watch Commercial Paper

Lehman Brothers (LEH) is one of the largest dealers in Commercial Paper, a decidedly unsexy part of the bond market. That market is accessed by Yankee banks, corporations and structured asset vehicles for short term funding of operations.

I am not wishing in any way shape or form for the demise of Lehman Brothers. They have probably been around for 150 years and it is my wish that they should survive for an additional 150 years. Unfortunately, the market scents blood in the water and is pressing the firm hard. One trader with whom I speak mentioned that the market is doing quite well without Bear Stearns and he felt that the price action today was the market “shunning” Lehman Brothers and the beginning of the process of life without that historic firm.

But I've meandered far afield from the CP market. I think that given the upper tier ranking of Lehman as an important CP dealer, the Federal Reserve is already in deep conversations with Lehman and others about the role which Lehman plays as a funding intermediary. If Lehman were suddenly to cease operation, the Federal Reserve would not wish to see an outcome which puts at risk the progress which they have made (thus far) in stabilizing the funding markets, via the various alphabet soup of facilities. There are probably several hundred companies which issue CP through Lehman and I would bet that contingency plans are in place to make sure that those firms are not cut off from the financing market for even the briefest time.

The trader with whom I spoke mentioned that he would be watching for unusual trading patterns in the CP market. He mentioned that on a typical day a dealer will not sell everything which they underwrite and that they often carry inventory. There are some pristine names which dealers are always happy to carry because they are easy to move. He offered Proctor and Gamble (PNG) as an example. He said he would be concerned if he saw in the street normally pristine names which dealers are willing to carry. He said that sign would be a bit of a canary in the coal mine that signals that Lehman has been cut off from access to the funding markets and cannot carry inventory overnight.

Once again, I do not wish that firm ill. I have a nephew who works there, as well as friends from my days at JPMorgan (JPM). So I hope that they find a way to survive, and ultimately, thrive.

Comments

[dlaw:]

Betcha it happens, though.

Seriously.

It makes a lot of sense.

Lighten up, Francis.

www.youtube.com/watch?...

2008 Sep 09 06:05 PM

[madasiwannabe:]

Everyone knows LEH is probably the most CDO over exposed investment bank on Wallstreet. They need capital and the CEO has been playing poker with the Korean's to make a profit when he should have been looking for a way to cover. Unless they show a profit or have a signed deal very soon, they are going to be the next ones to get a Friday visit from the Feds.

2008 Sep 09 06:20 PM

[ozcutty2:]

it would appear that LEH is toast. They can't raise capital, they don't have any collateral, all they can do is sell their asset management business or debt at fire sale prices.
I am wondering why BAC, JPM or WFC haven't made a bid, maybe they are waiting for the fed to hand it to them on a platter ala Bear Stearns. That way they can get a government gaurantee on the debt that they are taking on

2008 Sep 09 10:17 PM

[reggs:]

I know that there are names that dealers don't mind carrying but the goal, depending on market condition is to sell the paper to investors. Many companies issuing paper don't allow dealers to "inventory" their paper. Again, unless there is a huge rally, most dealers just assume they sell the paper and take their spread. Now, I haven't been in the cp market for years, but that is the way it worked when I worked on a cp desk.

2008 Sep 09 10:19 PM

[1worldcurrency:]

Sep 10 03:02 AM
Thanks Eli Hoffman for your response. I am a big believer in free speech, and news publishers should be able to report any rumor it believes might be true, such that President Kennedy was killed by the CIA.

But in this case Seeking Alpha was totally irresponsible. There have been numerous unfounded rumors that all sorts of entities are about to throw capital at Lehman. But if a short seller says something negative about the firm that is probably true, he is investigated by the SEC.

Several hundred million shares of LEH traded yesterday. For you to print a rumor late in the day that they got an offer for 11 dollars when they stock was at 8 you damn well better have a source.

2008 Sep 10 03:05 AM

[PAUL&&SHARK:]

Junk like you created this mess,now you will pay for it.
Ask your nephew and old friend from JP Morgan,maybe they have some Swiss watch to sell like Rolex,Patek,Vacheron,B... also I would buy art deco,jewelry.
I am paying higher than a pawnshop they will soon go to sell everything.
As it seems you are a master banker (my Franck Muller master banker watch is more smart than you,as his brain is very precise) so I will pay you 2.5-5% commission if you will introduce me with your nephew and old friend from JP Morgan.
How old he is?

2008 Sep 10 07:11 AM