Merrill Throws Lehman a Lifeline
The last thing a financial institution needs is uncertainty. That’s a big reason why Lehman Brothers (NYSE: LEH) finds itself scrambling to reassure investors that it is not on the same downward spiral as Bear Stearns. The subprime-infected investment bank got a badly needed vote of confidence today from Merrill Lynch analysts who said investors should buy Lehman because the funding concerns that sparked a 17 percent decline this week are exaggerated.
Lehman does not have the same solvency risks that caused JPMorgan Chase & Co. and the Federal Reserve to bail out Bear Stearns Cos., analysts including Guy Moszkowski wrote in a research report, according to Bloomberg. The stock’s decline “more than priced in” the probability Lehman will raise money from investors and report a second-quarter loss of 74 cents a share, the analysts said.
Lehman shares have meaningfully undershot fair value in the last few days on speculation and concerns that are not justified,” the analysts said. “The stock has over-corrected to the downside.”
Still, Lex expects Lehman to remain under selling pressure unless it acts decisively to remove uncertainty , either by selling assets or raising new capital.
The Fed’s discount window facility that came too late for Bear Stearns may give Lehman some breathing room to clean things up, but much of the discussion now has shifted to a possible sale of the business.
FT Alphaville provides a good rundown of recent developments. Today’s Wall Street Journal suggests a firm such as Blackstone, Citadel or JC Flowers would make a logical buyer, but Felix Salmon at Portfolio.com is concerned that private equity ownership would not be transparent enough to alleviate uncertainty.
CreditSights believes Lehman is “more of a target for a strategic acquisition by a bigger and more global banking company. In the last couple of months, there has been market talk that Barclays could be interested in Lehman, as well as other European banks like Unicredito of Italy taking a strategic stake.”
“We noted during our Credit Crisis Conference, that while Lehman would probably survive the various credit crunch and liquidity bouts, that it would be difficult for it to thrive in this environment with limited revenues growth opportunities.”
In its recent downgrade of Lehman, S&P stated that it believed Lehman had a “good liquidity platform and funding structure”. On the other hand, S&P acknowledged that in the current market environment perception can become reality and increasing pressure and questions about on Lehman’s liquidity has led it to have heightened concerns over Lehman’s ability to withstand these pressures, CreditSights said.
So, S&P seemed to acknowledge that its own view of Lehman’s liquidity (”good”) was less important than market rumors and fears which have caused pressure on the company.
Greenlight Capital’s David Einhorn certainly understands this and seems to doing all he can to turn it into a self-fulfilling prophecy. “For eight months now, Mr. Einhorn, a rabble-rousing hedge fund manager, has pilloried the venerable Lehman Brothers in an effort to drive down the bank’s stock price, which he is betting against,” the New York Times reports.
The Times says Einhorn instigated the latest dive in Lehman’s stock price two weeks ago when he encouraged other investors to short the stock at a large conference in New York.
In its latest Short Interest report, Credit Suisse notes that short interest in Lehman increased 25% month-to-month in May after increasing 27% in April.
We attribute the increase to concerns over deleveraging, incremental write-downs in Lehman’s residential and commercial real estate exposures, and prospects for a 2Q08 net loss.
Overall, short interest for the Brokers & Multinational Banks increased 7% month-to-month after increasing 23% in April.
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June 6th, 2008 at 11:39 am
[...] about bank capitalization came to the fore this week, most notably in the form of worries about Lehman Brothers. The investment bank is clearly not out of the woods, but at least has a few advantages that Bear [...]