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May 21, 2008

Lehman Has Already Spent All of the "Confidence" Money It Just Raised
by Reggie Middleton

Lehman Brothers raised $4 billion dollars to allegedly "prove" to the market that it was liquid and had confident investors and trading partners. I didn't believe that to be the real reason then and I really didn't believe it now. The news is out that the Fed has probably hit a floor in dropping rates, with inflation and unemployment concerns rising. As I stated in my earlier articles on the banking industry, this spells trouble for banks relying on expanding net interest margins to bail them out of their insolvency situations. I knew this was bound to happen, for effective (headline) inflation is out of control and we are bordering negative rates as it is. So as a result, those banks facing the potential of insolvency are now that much worse off. This is a big deal for the investment and commercial banks - a very big deal. My next few posts will concentrate on this, and I will wind them up with a few more of my personal shorts in the sector. Now, back to Lehman...

Lehman raised $4 billion dollars about a month ago. That is the credit. Now let's add up the debits:

• They had to buy out two investment funds that they ran, engulfed in losses, for $1.8 billion.
• They are rumored to have losses on their portfolio and their hedges, to the tune of about $1.5 billion to $2 billion.
• They are firing about 5% of their workforce which will demand severance packages, let's say conservatively about $100 million.
• They issued a smoke and mirrors earnings report last quarter which hid the fact that they took a cash loss. This means that they IB broken business model is probably taking effect already at this institution.

Now, if we 4, subtract 1.8, less 1.7, less .1, we get $3.6 billion in outflow. I am assuming Lehman didn't net the full $4billion that was stated as the gross offering amount. So, roundabout, net-net, Lehman is pretty much back where they started from when the market was driving their stock down to $20. I am obviously not the only one who has this funny calculator since Lehman dropped 6.5% today. Let's not forget the Street's Riskiest Bank, which also fell $1.92 today. The Breaking of the Bear was not the only article that had the ability to appeary highly prescient against the back drop of the risky macro scene for banks: Banks, Brokers, & Bullsh1+ part 1 and Banks, Brokers, & Bullsh1+ part 2.

My next post will outline some of what I believe to be the riskiest commercial banks and thrifts in the country, at least the ones whose share prices are still high enough to attract my attention.

Reggie Middleton
http://boombustblog.com/

Reggie Middleton is the personification of the freethinking maverick--the penultimate nonconformist as it applies to macro strategies, investment, and analysis. He uses his background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation, and financial analysis to pursue, analyze, and capitalize on global macroeconomic opportunities.

Finding most available research lacking, both in quality and quantity, Mr. Middleton assembled his own talented research staff. As forensic research is a lynchpin for his own investing, "to actually put food on the table," he stands behind it as doing what it is supposed to do - illustrate, elucidate and educate.

He does not sell advice or research. He is an entrepreneur who exists outside of mainstream corporate America and Wall Street. This allows him the freedom to do things that many cannot--perform without conflicts of interest and corporate politics. He prides himself on developing some of the highest quality, actionable research available - regardless of price. He welcomes any and all to peruse his blog of freely available analysis, opinion and participatory social media; use his custom tools, download files, interact with the community and make critical comparisons from a results orientated perspective. Reggie believes ideas and implementations are improved and fine-tuned when bounced off of the collective intellect of the many, in lieu of that of the few - in essence, a form of collaborative open source financial analysis.

Visit his blog Boom Bust Blog.

Copyright © 2007-2008 Reggie Middleton

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