Mar 17, 2008

Is Lehman Brothers Next to Collapse in the Post-Bear Stearns Panic?

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Following emails from DBS Group Holdings Ltd., Southeast Asia's largest bank, to traders not to do business with the Lehman Brothers, shares in the Wall Street icon plunged $14.83, or 37.8 percent, to $24.43. This represented a drop in Lehman's market capitalization to $12.96 billion, as opposed to the $20.8 billion the stock possessed at the close of trading on Friday.

Lehman Chairman and CEO Richard S. Fuld Jr. attempted to reassure investors today that his company - the fourth-largest U.S. securities firm - can weather any run on the bank's reserves and the associated stock sell-off.

"The Federal Reserve's decision to create a lending facility for primary dealers and permit a broad range of investment-grade securities to serve as collateral improves the liquidity picture and, from my perspective, takes the liquidity issue for the entire industry off the table," he said.

Lehman Brothers will join fellow Street player Goldman Sachs in reporting first-quarter earnings tomorrow. Investors are unlikely to be impressed with the anticipated $500 million in additional writedowns from the firm's exposure to highly-leveraged loans, and it would not be surprising to see shares of Lehman Brothers stock drop into the low teens. LEH has traded as high as $82.05 per share in the past 52 weeks.

Of course, Bear Stearns representatives crowed a similar rendition of "Don't Worry, Be Happy" as late as last week from their perches at 383 Madison Avenue, headquarters of the beleaguered conglomerate. Alan Schwartz, President and CEO of The Bear Stearns Companies Inc., issued a press release last Monday claiming "Bear Stearns' balance sheet, liquidity and capital remain strong," and that there was "absolutely no truth to the rumors of liquidity problems" at the investment bank.

My suspicion is that today's Fed risk guarantees and JP Morgan fire sale purchase of BS stock (pun fully intended) will only delay the inevitable reckoning with the hundreds of billions of dollars in bad subprime loans that caused the house of cards to collapse. Moreover, despite Treasury Secretary Henry Paulson's attempt to convince us otherwise, the federal government in essence bailed out Bears Stearns, effectively rewarding the company for a lousy investment strategy, giving us the corporate equivalent of rigged employee performance evaluations.

Of course, had the government sat idly by and allowed the mighty Bear Stearns to collapse, the result would likely have been panic on a level unseen since a certain dark day in 1929. You know that the situation is dire when such stalwart cheerleaders for Wall Street as Alan Greenspan start making historical comparisons.

And that, kiddies, might cause people to stop worshipping so fervently at the Altar of the Unseen Hand, a turn of events much more disturbing to the high priests of global capitalism than the failure of a bank like Bear Stearns. When the working stiffs stop believing in the happy financial fairy tales dished to them by their leaders, things can get pretty dicey.

5 comments:

Anonymous said...

RIP, LEH and GS.

microdot said...

My wife and I have small nest eggs.
We see the American economy trembling and the dollar shrinking. Today, my dollar is worth only 42 centimes.
Consequently, I don't spend dollars unless I have to.
I am faced with the neccessity of earning Euros and as I push 60, I am doing more manual labor than I was when I was 20.
I don't see this turning around any time soon and I see of future with everyone having to alter their lifestyles and expectations.
I am sure glad I bought my present house and property in cold cash!

dr-exmedic said...

You know, maybe if they actually let the danged company collapse, people would get the hint and be more careful about investing the next time around, so we wouldn't have these problems a second time. All the Fed managed to do was tell the American people not to worry, the government will bail out large failing businesses all the time! And of course it's not the executives of the companies who take the hit when the gov't does that.

Just as they have been doing for years, I suppose.

Donnie said...

Are you Nostradamus?

historymike said...

Heh.

If I could foretell the future, I wouldn't be wasting my time on this blog - I'd be day-trading and amassing a fortune.