Lehman Brothers looks likely to be swallowed very soon. There is very little room left for the company to remain independent. If it manages to stay independent, the structure is probably unable to attract the kind of business it has been doing before. As the mortgage market crisis unfolded in the summer of 2007, investors began to fret that Lehman Brothers would stumble, and its stock began a steady fall from a peak of US$82 a share. The fears were based on the fact that the firm was a major player in the market for subprime and prime mortgages; it is also the smallest of the major Wall Street firms, raising the risk that large losses could be fatal.
Traders appear to be continuing to act on rumours that the bank is due to be sold to any number of would-be purchasers, including Barclays and Canada's Toronto-Dominion. The rumour has it that Barclays was going to under-bid for Lehman and buy the company for US$15 per share.
Lehman and Bear Stearns had a number of similarities. Both had relatively small balance sheets, they were heavily dependent on the mortgage market, and they relied heavily on the “repo” or repurchase market, most often used as a short-term financing tool.
Lehman has also fought a running battle with short seller. The company accused them of spreading rumors to drive down the stock's price; Lehman's critics have responded by questioning whether the firm had come clean about the true size of its losses. For eight months now, David Einhorn, a notable hedge fund manager, has voiced his negative views on Lehman while at the same time publicly acknowledging that he has been shorting the company's stocks.
David Einhorn, who runs a US$6 billion hedge fund called Greenlight Capital, has been profiting from the Lehman’s growing pain. Critics say he is needlessly fanning fears about the precarious health of the financial industry at the very moment executives are struggling to stabilize their ailing companies. Many on Wall Street still wonder if hedge funds like Greenlight helped bring down Bear Stearns and spread false rumors about the bank, a possibility the Securities and Exchange Commission is investigating.
Einhorn said he was not out to tell Lehman Brothers how to fix its problems. He questioned how the company valued the assets on its books, and whether it was disclosing all the risks it faces. Investors have good reason to question banks: Worldwide, financial companies have suffered more than US$380 billion in write-downs and credit-related losses in the last year, laying bare their shoddy risk management. Lehman has been singled out because of the large role it played in the mortgage market and its reluctance to disclose information about its assets compared with other Wall Street banks. David Einhorn said he began betting against Lehman’s stock last July, and he has been right so far. But things have not always gone his way. Amidst all that, Einhorn has also come out with a new book “Fooling Some of the People All of the Time”.
The market cap of Lehman Brothers now is around US$11.6bn and falling. It is unlikely that the company will fall into private equity firms as the company needs to be absorbed into a bigger house for it to exists. Lehman is standing firm thanks to the Bear Stearns' experience. The Fed is expected not to allow Lehman to collapse. Can we also conclude that some of the likely bidders will also be asking from the Fed, the "same funding package" it gave JP Morgan? How to offer that package if the suitor was a foreign house like Barclays or Toronto-Dominion?
p/s photos: Saki Seto
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