After the government takeover of Fannie Mae (FNM) and Freddie Mac (FRE) on Sept. 7, many observers have wondered if the next financial domino to topple would be beleaguered investment bank Lehman Brothers (LEH). Lehman is not sitting still, however, and on Sept. 10 the firm announced a number of moves (BusinessWeek.com, 9/10/08) to help it shore up its capital, including the sale of a majority stake in its investment management business and a big cut in its quarterly divided. It also reported a $3.9 billion third-quarter loss.
Here is a roundup of what Wall Street analysts, strategists and other experts had to say about the Lehman situation on Sept. 10, as compiled by BusinessWeek and Standard & Poor's MarketScope.
Cubillas Ding, senior analyst, Celent:
Lehman Brothers' latest results continue to open up what's inside Pandora's box and it's not pretty. The risks that the firm had taken on within the real estate markets and related investments seem highly concentrated.
As we gaze toward year's end, the rough forces involving substantial and sharp moves in credit markets, intense funding pressures, and a reduction in leverage among banks will continue to play out.
With the strategic initiatives announced, Lehman is being forced to make hard decisions now that the various options on the table have narrowed and balance sheet concerns start to bite.
A bigger question remains: if Lehman moves into the future without its investment management business, issues regarding its future and sustainability as a pure play investment bank arise. Finding stable funding sources, especially when the markets are not looking to recover in the short-term, is an issue that senior management needs to provide a compelling solution for.
Matthew Albrecht, equity analyst, Standard & Poor's:
We view [Lehman's] restructuring plans announced today favorably, but we remain cautious on the shares based on extensive remaining execution risk. We think shareholders benefit from a spinoff of [the firm's] commercial real estate assets, but mark-downs may remain for the November quarter. We think the sale of the investment management stake would provide capital and allow for some participation in profits [from Lehman's remaining stake], but the terms are not yet set. Our fiscal 2008 (Nov.) loss estimate widens to $10.26 per share from $7.44, and we trim our target price $6 to $14.
Staff analysts, Action Economics:
Lehman credit default swaps surged another 115 basis points to a record 590 basis points today (after a 110 basis-point jump yesterday) after it disappointed with its earnings news, according to Bloomberg, citing a broker at Phoenix Partners. The prior peak was 580 basis points, seen after the Bear Stearns mess in mid-March. Predictably, comparisons are being made with Bear Stearns, whose CDS traded in the 600 basis points region in early March. But while the market is still trying to press the issue with Lehman, with some talking about an "end-game" for the bank, many suspect the Fed's new credit facilities, which obviously weren't avalable to Bear, should buy Lehman some time. Lehman shares have rebounded, albeit only modestly, from the 50% slide since Monday.