Wall Street Breakfast: Must-Know News

• Lehman Brothers, Part I. Fighting for survival, Lehman (LEH) released FQ3 earnings on Wednesday showing major losses (see below), and announced a turn-around plan: Lehman will cut its dividend by more than 90%, plans to sell $4B in U.K. mortgages to BlackRock (BLK), and plans a Q1 spin-off of $25-30B in commercial real estate assets into Real Estate Investments [REI] Global, a separate company. Lehman will inject $5-7.5B into REI Global, and lend it funds as necessary. The troubled I-bank will also sell around 55% of its investment management business, including its prized Neuberger Berman unit, and its private equity arm. The sale, which Lehman hopes to announce in October, could be worth $8B, more than Lehman's current market value of under $5B, and would provide the cash for the REI Global deal. CEO Richard Fuld, who had stressed his desire to keep Lehman independent, said he would consider offers to buy the entire company.
• Lehman Brothers, Part II. Investors were skeptical of the new plan, noting that it held only intentions instead of completed deals or agreements. Analysts also suggested that Lehman is trying to have its cake and eat it too, with plans to sell 55% of its money management business while "retaining the majority" of its pretax income. Although Fuld said the firm will not have to raise any extra capital after the asset sales, Lehman may need an additional $6B to plug holes in its balance sheet and may be forced to try and sell additional assets. Meant to be a stock boost, Fuld's plan sent the share price plummeting - shares closed down 7%, to $7.25, in Wednesday's trading.
WSB Sponsor
Wall Street Breakfast readers: Gain actionable investment ideas from Bill Ackman, Mohnish Pabrai, Leon Cooperman, David Einhorn and more (full list).

Twice a year, hundreds of value investors – who manage tens of billions of dollars for hedge and mutual funds – get together to share ideas and learn from investing legends at the Value Investing Congress October 6-7 in NYC. As a sponsor, we've secured a special discount. Use discount code N8WSB1 before 9/5 to save $1100.

Your next great investment idea could be waiting in NYC. Register today!


• Fannie sells debt. Optimism after the government's bailout helped Fannie Mae (FNM) sell a record $7B in two-year notes. The debt was sold at 0.70 of a percentage point over comparable Treasurys, yielding 2.896%. With over $9B in orders, the sale was viewed as extremely successful. Shares rose 8% in after-hours trading.
• Feelings aren't mutual for WaMu and investors. Washington Mutual (WM) saw its shares fall to a 17-year low yesterday (-30%, to $2.32) on worries that it won't be able to find a buyer or raise the necessary capital to cover growing mortgage losses. The cost of protecting $10M of WaMu debt from default over five years reached $4.3M up front and another 500K annually on Wednesday, suggesting that investors believe there is an 85% chance of a WaMu default within five years.
• Hide and seek with the tax authorities. A U.S. Senate investigation has named Lehman Brothers (LEH), UBS (UBS) and Merrill Lynch (MER) in its report for selling complicated financial products designed to shield clients from U.S. tax liabilities. Hundreds of millions of dollars in taxes have been skirted, and some politicians are pushing for the IRS to pursue back taxes or penalties against the Wall Street firms. Citigroup (C), Morgan Stanley (MS) and Deutsche Bank (DB) were also named in the report for helping investors dodge taxes.
• Mystery suitor for ImClone. ImClone (IMCL) rejected the $60 per share unsolicited bid from Bristol Myers Squibb (BMY), calling the offer inadequate. In the same press release, Carl Icahn announced that a major pharmaceutical company was considering a $70 per share offer. Declining to name the potential bidder, Icahn also did not indicate whether a $70/share offer would be considered high enough, and said only that the bidder would be given two weeks for due diligence. Speculation about potential buyers includes Pfizer (PFE) and Germany's Merck KGaA.
• Crowded view from the Fed's discount window. Already lending at record highs, the Federal Reserve may have to further increase the funds it makes available to banks and brokers in order to help them balance their end-of-year books. With eleven bank failures this year, six of them in the last two months, and rising concern about Lehman (LEH), banks are increasingly unwilling to lend to one another, pushing the costs of banks' borrowing to a four-month high. Says Brian Sack, formerly of the Fed, "This could be the mother of year-ends. The markets will need extraordinary actions to get through it."
• BofA pays up. In the latest settlement in the ongoing auction-rate securities [ARS] probe, Bank of America (BAC) reached an agreement with Massachusetts to buy back roughly $4.5B in ARS from around 5,500 small investors. The move comes two weeks after BofA agreed to buy back $43M in ARS from Massachusetts' government agencies, and will result in a pretax charge of about $275M.
• Deutsche Bank looks to expand. Deutsche Bank (DB) is in advanced talks to buy a stake in rival Deutsche Postbank. A German paper reported that Deutsche Bank hopes to buy just under 30% of Postbank, and sources say a deal has been broadly agreed upon. Deutsche Bank, Germany's largest bank and one of the top ten biggest losers in the global credit crunch, has been looking to bolster its retail business. Deutsche Bank has also agreed to buy a 40% stake in Russian investment management company UFG to shore up its regional asset management division.
• Vishay continues its buying binge. After an earlier bid was rejected, semiconductor maker Vishay Intertechnology (VSH) raised its takeover offer for International Rectifier (IRF) to $1.7B. The bid represents a 22% premium on IRF's closing stock price from the day before the original bid was announced (Aug. 15). Analysts believe the $23/share bid is probably still too low and Vishay, which has been on an acquisition spree for the past few years, may have to come back with an even-higher third offer. IRF shares rose 7% in Wednesday's trading.
• EIA petroleum status. Petroleum inventories: Crude -5.8M vs. -4.4M consensus. Gasoline -6.5M vs. -4.2M. Distillate -1.3M vs. -2.7M. Crude futures +0.04% to $103.30.

Earnings: Wednesday Before Open

• Lehman (LEH): FQ3 EPS of -$5.92 misses by $2.57. Revenue of -$2.9B. Shares close -6.9% to $7.25 on Wednesday. [PR]

Today's Markets

• Asia markets closed broadly down. Nikkei -2.0% to 12,102. Hang Seng -3.1% to 19.389. Shanghai -3.3% to 2,079. BSE -2.3% to 14,324.
• In Europe at midday, London -1.3%. Paris -1.0%. Frankfurt -1.3%.
• U.S. futures: Dow -1.1%. S&P -0.9%. Nasdaq -1.1%. Crude -0.5% to $102.04. Gold -2.0% to $747.

Thursday's Economic Calendar

• 8:30 Import/Export Prices
  8:30 International Trade
  8:30 Jobless Claims
  9:00 RBC CASH Index
  10:00 Quarterly Services Survey
  10:35 EIA Natural Gas
  2:00 PM Treasury Budget
  4:30 PM Money Supply
• Notable earnings before Thursday's open: CPB, LULU

Seeking Alpha editor Eli Hoffmann contributed to this post.

Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.

After you finish reading Wall Street BreakfastSeeking Alpha's Market Currentswill keep you current all day long.

Comments

[Shiftless:]

Won't it be fun to watch the shorts get squeezed if/when WaMu puts a deal together over the weekend. Further, it occurs to me that if I were a JPMorgan or some other party interested in buying WaMu I would have my traders crushing the stock as much as possible before offering to buy it.

2008 Sep 11 10:08 AM

[notsosmart:]

what a sad game this all has become.this is supposed to be financial investments for ones future that was trustworthy & ethical.the world watching must crying as they hold our valueless toilet paper & laughing at the same time at what this country has become.there are more that wish us ill than good & we play right into their hands.watch out for the enemy within.

2008 Sep 11 10:33 AM

[hanson001:]

notosmart: Why the pride man? The world will follow us down the rat hole. Look at the sovereign wealth funds; they haven't made good on their investments here. Look at all the foreign banks that hold our government paper. This is global, and while our ship is sinking, they are taking on water also.

2008 Sep 11 11:15 AM

[bbowen7:]

We do need enough foreign confidence in our financial system to convince them to pump in $60 billion per month to feed our habits. I can't imagine that continuing for long - at some point they'll only take hard assets.

2008 Sep 11 12:24 PM

[Longviewer:]

Deal with reality, and improve on it. Matching our emotions with bad news does not deal with it, however, artificially enhances the problems via perception. The first thought should be, okay, as an investor, how will I safeguard what I have and find ways to increase my gains across the board in my own micro or family economy? Put together a comprehensive plan.

Study, clear thinking, patience, care, precision, balance ... the same values apply to wise decisions. If we want value, we must build it.

2008 Sep 11 12:26 PM

[notsosmart:]

longviewer-if you cant believe the unethical crowd what good is the longwiew?ask the enron employees,the worldcom emplyees,lately the bear stearn crowd.you cant do it if people lie,are unethical,& have little or no accountability.

2008 Sep 11 01:25 PM

[PacificGate...:]

OMINOUS SIGN BEHIND PAULSON’S ACTIONS HAVE ESTABLISHED A TREND

And as usual the taxpayer is on the hook in the biggest bailout ever, and forever after that as more bailing is required.

WHERE IS CONGRESS ON THIS?

The best we hear from it is related to suggesting reduced severance packages for outgoing executives? How limp.

How about a thorough analysis into the self serving actions of these institutions? Taxpayers deserve no less.

How ironic that the biggest Government INTERVENTION in history is being implemented under Bush’s watch, after his policies stimulated and allowed the abuse.

2008 Sep 11 02:14 PM

[notsosmart:]

socialism has arrived under a conservative administration.LOL.

2008 Sep 11 04:20 PM

[Shiftless:]

See the short squeeze on WaMu and rejoice. If a company with this apparent weakness can fight off the vultures there's hope for the entire financial sector.

2008 Sep 11 04:37 PM

[Poor Jim:]

Dick Fuld has been a day late and a dollar short right along, at least since June when Lehman was "discussing" selling off assets and the news got out, which caused Fuld to take his eye off the ball and start trying to find out, screaming, "Who leaked??!!"

He has constantly been playing catch-up, waiting too long to make the moves he could have made sooner, and by trying to save everything saving nothing....

except for his own net worth, which will obviously take a hit, but nothing like those his shareholders are taking.

The least Paulson could do is take away Fuld's passport.

Anybody got any other ideas?

2008 Sep 11 05:02 PM