Saturday, June 14, 2008

Lehman's weekend

Bear Stearns had this to say in their 10Q regarding the JPM merger.

"Human error in times of extreme difficulty and turmoil, such as the Company recently experienced and continues to experience, can occur. Moreover, control and process breakdowns may be more frequent when a company is operating under duress and its employees become distracted by crisis management and the uncertainty surrounding the viability of the enterprise. These events and potential impacts may have had and may have an adverse impact on the efficacy of our disclosure controls and procedures and our internal controls over financial reporting."

Bear moved $7 billion of mortgages into level 3, and $700 million of swaps, and had $37 billion in Level 3 assets, and the Feds had to take them over.

Today, CNBC reported that Lehman was reportedly in talks to sell themselves:

The weekend meetings are unusual, say people close to the firm. The executives summoned to headquarters include everyone from Stephen Lessing, the head of Lehman private client group to Scott Freidheim, the firm's co-chief administrative officer. It is unclear if the meetings are related to a possible deal, or just preparation for the Monday's official earnings announcement, possibly the most important earnings release for Lehman in recent years.

A spokeswoman for Lehman had no comment. Contacted at his office on Saturday morning, Freidheim had no comment as well.

Wall Street executives say Lehman's current problems have taken a tremendous toll on CEO Fuld, known as the "gorilla" on Wall Street because of his tough management style that has saved Lehman from crisis in the past.

Fuld has resisted selling Lehman to bigger players in the past, and in doing, has built one of the most successful securities firm, which before the recent crisis was a darling of Wall Street.

However, many Wall Street executive believe the current fiscal crisis hitting Lehman is different that past troubles because of the size of the bad loans on the firm's balance sheet, and because Wall Street firms will likely face eroding profit margins for at least the next year.

Like most firms on Wall Street, Lehman has been cutting back on how much risk it will taking in trading and other businesses, in an attempt to prevent the firm from imploding as Bear Stearns did three months ago. While taking less risk may soothe investors concerns that the firm may lose even more money, it also means that Lehman will produce lower profits in the future.

The lower profit margins combined with the possibility of further writedowns of losses could force Fuld to sell the firm. At the very least, people close to Lehman expect Fuld to make some announcement about Lehman's future on Monday when it releases earnings.

Everyone tells us that Lehman is not Bear. CFO Callan (who didn't put on any of these trades!) and COO Gregory were canned Thursday. I guess Erin won't have to get back to the analysts Monday, as she had promised when Lehman gave their preliminary numbers this week. I guess a takeover/under doesn't qualify as a strategic partner. Erin on the call:

But it will be consistent with our objectives and certainly balance sheet is not something we need at this point from a strategic partner.

On the leveraged finance Erin said this:

Apologies, we really wanted to give the specific number but as I’ve given the approximation of the balance sheet numbers at this point, we actually pulled back on that and we will definitely give those numbers next Monday.

Commercial real estate mezzanine:

I didn’t comment but just as a guide and again, I’ll get into this in more detail next week, roughly 80% is senior and 20% is mezz.

The percentage markdown in residential mortgages:

I don’t have the original total in front of me, so I can come back to you on that, what that specifically translates in to.

How much was Alt-A reduced?

Yes, I will give that next week Mike. I don’t have the breakout yet on the balance sheet between Alt-A and some of the other asset classes within resis. So, we will give that in full next Monday.

If Lehman's sale prices were lower than the marks UBS took:

Well, we never tell you specific marks nor do we tell you marks across asset classes but I can certainly give you a sense of whether there has been deterioration in prices from that point in time.

With $40 plus billion in Level 3 assets, at least a merger agreement will put these questions on the back burner!

Spreckin ze Deutsche?

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