Lehman’s survival as an independent firm looks increasingly in doubt, yet the shape of an end game is not yet clear, although, per T.S. Eliot, it likely to conclude with a whimper.
The market’s reaction to Lehman’s way worse than expected earnings announcement of $3.9 billion in loses due to $5.6 billion in writedowns was ugly, but even uglier is the lack of much (any?) progress towards getting the firm out of its fix. Yes, dividends are being cut, but the other two key elements, spinning off much of the troubled commercial real estate portfolio to shareholders and selling (well, sort of, as we will discuss) its asset management business.
But what would be left? A firm shorn of its best asset, now even more heavily skewed toward fixed income, which by all appearances is suffering not only a cyclical but also a secular decline. The private securitization market is much smaller than it used to be and does not appear likely to return to its former size for a very long time. if ever.
The new (or rather, more openly discussed theme) was can and should Fuld survive? Both the Wall Street Journal and the New York Times have reports on that topic, never a good sign. However, who would take his job? He may remain in place by default if the board is able to box him around the ears.
From the Times:
“I think it’s possible he could be pushed out any day,” said William T. Fitzpatrick, an equity analyst with Optique Capital Management. “You’ve got a stock that’s basically in free fall.”Lehman executives insist they and the company’s board stand behind Mr. Fuld, who has pulled Lehman back from the brink time and again. But Mr. Fuld has been slow to sell troubled assets and secure the financial lifeline many analysts say Lehman needs, steps that become more difficult every time Lehman’s stock falls further.
The Wall Street Journal tells us:
Mr. Fuld has presided over a stock decline of nearly 90% this yea…Investors are growing increasingly frustrated…During his 14 years at the helm of Lehman, the former bond trader has built a reputation for driving hard deals and guarding the independence of the company that he has run like a close-knit family. But those who have negotiated with Mr. Fuld in recent months say he may have played his hand too aggressively — holding out hopes that his firm was buffered from continuing pain on the market, and seeking better deals from would-be investors only to see potential partners walk away.
Critics say the 6-year-old Mr. Fuld has been unable to take the steps necessary to shore up the ailing Wall Street giant. Amid the housing bust, they say, he has refused to drastically mark down the value of his firm’s massive real-estate holdings. Mr. Fuld waited to raise capital until after many of his rivals. These critics say he has believed, mistakenly they say, that his access for the past six months to Federal Reserve bank-lending facilities would buffer the firm from continuing pain.
The Journal story has some good reporting on how Fuld’s pushing for the best deal and impatience undid some possible deals.
Bloomberg tells us Lehman’s fate hinges on the sale of a stake its asset management unit, But the story contends Fuld is overplaying his hand:
“Fuld doesn’t want to let it go,” said Bruce Foerster, a former Lehman executive who is president of South Beach Capital Markets in Miami. “He went out of his way to buy it and he knows it’s a good asset.”…
Even a successful sale may not be enough to satisfy credit- rating companies. Moody’s Investors Service said it was reviewing its ratings for Lehman, and may lower them if the firm fails to reach a “strategic arrangement.”
The Telegraph, states in its headline what is becoming obvous: “Embattled Lehman Brothers regroups to ready itself for sale “:
Lehman Brothers effectively put itself up for sale yesterday alongside a last-ditch restructuring to stem the collapse in its shares..However, his [Fuld's] plan was overshadowed by the admission that Lehman’s “is committed to examining all strategic alternatives to maximise shareholder value”. Such phrasing is banker-speak for “up for sale”, and at least one senior banking source suggested that Lehman’s aim in restructuring its operations could be part of a cleansing process designed to make it more attractive to potential buyers
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Re: “dividends are being cut”
That is actually a positive for insiders that have option grants, because dividends dilute option grants, hence, as shareholders and regulators ignore the accounting anomalies related to the billions of lost shareholder equity, insiders will benefit, while shareholders continue to hold a bigger bag, filled with less loot … too bad suckers!