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Lehman Brothers Worth A Big Fat ZERO?

Companies / Credit Crisis 2008 Sep 09, 2008 - 05:13 PM GMT

By: Mike_Shedlock

Companies Best Financial Markets Analysis ArticleLehman is getting crushed today. It may not be long for this world. Bloomberg is reporting Lehman Shares Fall After Talks With Korean Bank End .
Lehman Brothers Holdings Inc. fell 35 percent in New York trading after talks about a capital infusion from Korea Development Bank ended. The Wall Street firm is continuing to negotiate with other potential investors, a person briefed on the matter said.

Lehman's market capitalization of $11.2 billion is almost equal to the value of its asset-management arm, which includes Neuberger Berman Inc. That leaves its main business of trading stocks and bonds as having little worth. The numbers are similar for Merrill Lynch & Co.: Take out its retail-brokerage and asset- management businesses, and the investors' valuation of the rest of the third-biggest U.S. securities firm is zero.

Goldman Sachs Group Inc. analyst William Tanona estimates another $12 billion of losses for the three firms in the third quarter. Those probably will wipe out any trading revenue for the period.

"Uncertainty requires a discount," said Roger Lister, New York-based chief credit officer for financial institutions at DBRS Inc., a Canadian credit-rating company. "Equity investors are worried about writedowns resulting in more dilution. That swamps longer-term valuations. Similarly, the credit-default swaps on these banks' debt are treated like junk."

Lehman would be crippled more than its rivals if it sold its asset-management division, he said. While Morgan Stanley and Merrill have retail-brokerage divisions to bring in revenue, Lehman would be hard-pressed to replace the income it earns from asset management.

Investors are having a hard time valuing the rest of the business at Lehman because there's no transparency about the mortgage securities on their books, said Janet Tavakoli, author of "Credit Derivatives & Synthetic Structures." Lehman, Merrill and Morgan Stanley borrowed heavily to fund their mortgage investments, which is coming back to hurt them, she said. The three investment banks' total assets were about 30 times their capital levels last year.

"When you're highly leveraged, you need to be very careful about the quality of your fixed-income assets," said Tavakoli, president of Chicago-based Tavakoli Structured Finance Inc. "Even if you held Treasuries, you could lose big money when interest rates moved against you. When you take credit risk as well, which was the case with mortgage bonds, then you're really in trouble."

From The Trading Desk

Minyanville professor Bennet Sedacca is writing about Lehman preferreds and Washington Mutual (WM) credit default swaps (CDS)

On Deck: Lehman

Lehman(LEH) preferreds are now offered in size at 17%.

Washington Mutual (WM) CDS are trading around the 30% level.

Me thinks LEH is next.

And if you own the preferreds, you can expect... zero.

The best case is that the company sells its good assets and ends up a carcase. Meanwhile, most of my Street contacts won't trade with 'em.

Key Strategic Initiatives

Lehman CEO talked about "key strategic initiatives".

THE key strategic initiative is to raise capital. And no one is biting. Without capital it is the end of the line. Lehman's equity is worthless. Depending on the agreement to raise capital, its shares could be worth zero even IF it does raise capital. Anyone smell another Fed sponsored shotgun marriage coming up?

By Mike "Mish" Shedlock

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2008 Mike Shedlock, All Rights Reserved

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