Wednesday, June 11, 2008

Time to test the "Bernanke" put

Remember last March when Lehman tumbled down to 20 before reversing up to the mid 40's? What stemmed the selling was the SEC investigating rumours about Lehman's health.

Then you had Citigroup upgrade the shares:

After being on the sidelines for a couple of years, we see the current valuation as an extremely attractive entry point into Lehman shares. Furthermore, the recent profitable quarter in a tough environment, the coordinated actions taken by the Fed & Treasury to provide meaningful liquidity, and Lehman’s management team’s excellent track record of creating value and managing risk all serve as excellent downside protection.

And then you had the Fed investigating the Lehman rumors.

Back then, Lehman's VIE (Variable Interest Entities) of which they had $7 billion in, were thought to be worth .27 cents on the dollar, for an off-balance sheet item.

We know that $1.44 billion of this was a Level 2 asset, with a discount rate exceeding 18%.

Now Citigroup's VIE have blown up everywhere:

Citigroup Inc. created a $2.5 billion mortgage-backed security called Bonifacius Ltd. in August as capital markets seized up and panic swept Wall Street.

The issue took the name of a general, called by historian Edward Gibbon the ``last of the Romans,'' who fought and died for a fading empire. The bonds were created from subprime home loans as demand evaporated. Within six months, Bonifacius collapsed as homeowners fell behind on their payments in record numbers...

Variable interest entities, or VIEs, are a post-Enron version of special-purpose vehicles, the term for the investments Citigroup created that led to the demise of the energy-trading company. The lack of disclosure about VIEs is adding to concern among investors after financial institutions reported $382.6 billion of writedowns and losses from subprime-contaminated debt since the start of 2007...

The securities behind Bonifacius consist of 288 prime and subprime mortgage bonds, other CDOs and Alt/A debt, which is based on mortgages that straddle prime and subprime.

Bonifacius, which means ``good fate'' in Latin, is divided into nine pieces. The largest, which was originally rated AAA, has since been cut to Baa3 at Moody's and to BBB- by S&P, the lowest levels of investment grade.

Banks are betting that markets will improve enough to allow the securities to be sold at a higher price, according to Stanley Sporkin, a former federal judge who helped write the federal 1977 Foreign Corrupt Practices Act when he was the head of the enforcement division at the SEC.

From John Thain's comments (see post below) we know pricing in CDO land is terrible, decreasing even more with the monoline downgrades.

So Citigroup, which set up Enron's Special Purpose Entities (SPE's) to fool investors, has billions that we don't know what they are worth, parked in these vehicles, of which Lehman has at least $7 billion. And next week, we'll find out a little bit more about it.

Remember how Citigroup's upgrade helped save Lehman last time? Today Merrill Lynch reversed course on it's Lehman upgrade last week. Who will upgrade Lehman now?

Today, we had some sloppy prices in sales of commercial real estate in Manhattan. That would make you ask the question-What is Lehman's piece in Archstone-Smith worth now?

Bear Stearns had septuagenarian billionaire Joe Lewis vouching for Bear, and buying another million shares a couple days before Bear hit the hands of the Fed.

This week, we had ex Pru-Bache head, sexagenarian George Ball, who's been involved in a twist or two, telling us that Dick Fuld was probably being extremely conservative with Lehman's marks. This was Monday morning on CNBC in the pre-market when the stock was in the 30's. At the close, Monday, someone bought 8.8 million shares at 29.48 to prop up the stock from the mid 28 level to help make the 28 price on the stock offering look good. And after Monday's close, we had another billionaire, octogenarian Hank Greenberg, ex head of AIG, touting CV Star's investment in Lehman at 28.

Two days later it's at 23.70.

Maybe the market really wants to see how strong the Bernanke "put" really is.

Will quinquagenarian Bernake of the Federal Reserve, answer that call?

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