Lehman in Dire Financial Straights

Less than 24 hours after losing nearly half of its Market Cap, Lehman Brothers (LEH) gave Wall St. another reason to be somber about the future and health of the investing house. The whispers that Lehman was in dire financial straits have been resonating for some time, but as they grew louder so did the negotiations with Korea Development Bank, which eventually halted.

The end of those negotiations was the prologue of Lehman's 40% sell-off on Tuesday, and the announcement of a $3.9Billion quarterly loss is another driving stake into Investors spirits regarding the firm. Write-downs totaled $5.6Billion, causing the massive loss, which was even worse than analysts had expected ($2.2Billion). The company is also trying to shore up capital by auctioning off over half of its asset management group, cutting its dividend and setting up a spin-off of real estate holdings.

While all that looks dire, and Investors are still licking their wounds from the end of talks with KDB, Lehman has bought itself a little time by outlining this strategic plan on the heels of massive losses. Investors are willing right now to give the company a little bit of rope, but the first sign of additional trouble, in the form of further losses, an uneventful auction process or whispers of unattractive sale prices for some of its assets, will see traders and investors alike moving swiftly to other companies and other sectors.

A tough task is facing management these days; as headlines mount clients and employees are more likely to leave, which would make an already unstable liquidity position all that more turbulent. However some deals have already been outlined by Lehman, including a $4Billion formal engagement with BlackRock Inc. to sell UK based residential mortgage holdings and the spin-off of a commercial real estate public company named Real Estate Investments Global in the first quarter of 2009.

Oh and Lehman also slashed the dividend from $0.68 to $0.05, and the market's history with banks cutting their dividends and their correlated market performance over the last year has been well known. But in trying times for the financial industry, drastic measures must be taken to keep liquidity at somewhat reasonable levels.

It wasn't that long ago that Lehman was praised, with the help of the Fed, of stepping in and saving Bear Stearns (BSC), but now it is closer than ever that Lehman stands near that same edge.

I think Lehman will be alright as the market rights itself eventually, but with it being in this sector with these problems it'll still be able to be gotten for cheaper than $8/share.

Disclosure: Author holds no position in LEH.

Comments

[contrariwise:]

Dire straits, not straights. Correct spelling, wrong word. And yes, I noticed the sell off. What's your point? Multiple blah blah blah paragraphs about how they're in trouble based on the slope of the stock price chart. Nothing concrete about the reasons behind it.

2008 Sep 10 10:21 PM

[uncle mike:]

this is what it,s like pretend your standing in the middle of the track at the finnish of the kentucky derby.as the horses come around the bend, you get a general idea of whos who, and where they are.but as they come into the home stretch thier all bearing down on you like a runaway locamotive.you can see them closing in wirh thier hoofs a flailing. but as they reach the finnish.they become a blur and you wait for the photo finnish to see who won right? uncle mike

2008 Sep 11 12:46 AM

[Konst:]

"It wasn't that long ago that Lehman was praised, with the help of the Fed, of stepping in and saving Bear Stearns (BSC), but now it is closer than ever that Lehman stands near that same edge."

Are you that clueless? It was JPM that stepped in.

Lehman has access to Fed's discount window which means they don't have a liquidity issue.

2008 Sep 11 01:39 AM

[kurt walter:]

If LEH fails, I am sure the sun will rise tomorrow. So let them fail. That is the risk of being in business. Having big daddy government use taxpayer money to bail any business out is flat out wrong. Feeling pain is good. Maybe next time poor business practices will be avoided because the pain is so bad. A bailout doesn't allow the patient to feel that pain.

2008 Sep 11 02:35 PM