BernieHund: The Political Watchdog

Well, we all remember Bear Stearns.  We all remember the false hope that was posted here and there about how the Bear could survive.  We all remember the midnight oil and the Fed to the rescue.

Now, it seems that Lehman is on the same track.  Sure, they say they can raise money and perhaps they can.  But, the money may not be the real issue right this minute.  With Bear it wasn’t that is couldn’t raise money initially.  What brought Bear to its knees was that once their losses were made public those they had relied upon to keep them going lost confidence.  With lost confidence came lost funding and lost trading and eventually lost jobs.

Today it appears to be Lehman who sits on the precipice waiting for the tipping point.

Lehman Brothers, seeking to ally concern that it might become the next Wall Street bank to founder, said Monday that it would raise $6 billion to shore up its weakened finances.

Bear Stearns tried to reassure everyone.

The move came as the investment bank stunned Wall Street with news that it had lost $2.8 billion in the second quarter, its first loss since going public in 1994. The deficit far exceeded even the most pessimistic forecasts and reflected a triple blow of soured assets, bad trades, and hedges that were supposed to cushion losses but instead added to them.

Bear Stearns stunned everyone.  The deficit far exceeded what was expected.

The developments mark a stark turnabout for the scrappy Lehman, which had repeatedly assured shareholders that it was managing its risks well. Many investors have feared for Lehman’s health since Bear Stearns collapsed, and the red ink at the bank could fuel the debate over whether Lehman, one of the smallest players on Wall Street, can survive as an independent firm.

Misplaced fear?  Or, realization?

“I am very disappointed in this quarter’s results,” Richard S. Fuld, Lehman’s chairman and chief executive, said in a statement.

Erin Callan, Lehman’s chief financial officer, said Monday that the bank had moved aggressively to reduce its leverage and bolster confidence among its investors. In addition to raising fresh capital by selling common stock and convertible preferred shares, Lehman has sold about $130 billion in assets since April, Ms. Callan said on a conference call.

“It’s designed to end the chatter of Lehman Brothers, and let us get back to business,” Ms. Callan said of the new capital. Lehman does not expect to sell more assets or raise more money, she said.

Bundle the severance package.  It’s getting close to the good-byes.  No one may be talking about it, but we all know that the heads roll when the news is bad.  Unless Fuld can pull a rabbit out of the hat or Ms. Callan’s butt, chances are both Fuld and Callan could be hopping on down the bunny trail… with a multi-million dollar “see ya” package, the kind large corporations seem to give those who bring down the house and squeeze it for the last penny before the collapse.

Such assurances aside, Lehman may not be out of the woods. The firm has been engaged in a very public battle with short-sellers who have questioned the way Lehman values many illiquid assets, like residential and commercial mortgages, and who have questions on the aggressive leverage the firm has engaged in.

Investors were particularly concerned about Lehman’s leverage level considering its small equity base. In a statement, the firm said it reduced gross leverage to 25 from 31.7 — borrowing $25 for every $1 of equity — at the end of the first quarter and reduced net leverage to less than 12.5 from 15.4.

The mention of “like residential and commercial mortgages” comes close to the kiss of death.  Perhaps, today it is only a brush on the cheek, but it’s worth mentioning and keeping our focus on.  Of course, if anyone sees the midnight oil burning at the Fed in New York again, we can expect to get up on Monday morning to learn about another multi-million dollar bailout.

Are we trying to act surprised?  Isn’t that what always happens?  No one ever seems to see it coming… no one. 

William F. Tanona, an analyst at Goldman Sachs, predicted that Lehman’s stock would fall as investors digested the unexpected loss, but would recover as the day wore on as short sellers covered their positions.

“Today’s results were far worse than anyone had anticipated,” he wrote. “Results were plagued by continued write-downs and ineffective hedges.”

Maybe some of those Wall Street types need to move to Main Street for a day or two.  No one I have talked to seemed to be surprised at all.  But, then again, we know they try to cover their ass-ets.