Comments on: “Blue Chip Forced by Law to Embarrass Itself” http://www.stockgumshoe.com/2008/06/blue-chip-forced-by-law-to-embarrass-itself.html Frustrated or intrigued by email teasers from investment newsletters and advisers? We solve them and track their performance here ... so stick around, participate and subscribe (it's free)! Sun, 21 Mar 2010 09:28:01 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: StockGumshoe http://www.stockgumshoe.com/2008/06/blue-chip-forced-by-law-to-embarrass-itself.html/comment-page-1#comment-3351 StockGumshoe Tue, 03 Jun 2008 18:38:31 +0000 http://www.stockgumshoe.com/2008/06/blue-chip-forced-by-law-to-embarrass-itself.html#comment-3351 Well, if you hated Lehman I hope you didn't wait until June 17 to place your bet -- this is down 20% in two days on icky news, possible capital raising, etc. The Stock Gumshoe is very glad to not be an investment banker. Well, if you hated Lehman I hope you didn’t wait until June 17 to place your bet — this is down 20% in two days on icky news, possible capital raising, etc.

The Stock Gumshoe is very glad to not be an investment banker.

]]> By: R Cook http://www.stockgumshoe.com/2008/06/blue-chip-forced-by-law-to-embarrass-itself.html/comment-page-1#comment-3335 R Cook Tue, 03 Jun 2008 02:50:54 +0000 http://www.stockgumshoe.com/2008/06/blue-chip-forced-by-law-to-embarrass-itself.html#comment-3335 I bought July 22.50 puts on LEH on Thurs of last week. Sold today for a 54% profit after comissions. Not bad for a quick trade, but wouldn't want to stay in too long on this one. As they say, (pigs get slaughtered). My next put play will be on VMW. I bought July 22.50 puts on LEH on Thurs of last week. Sold today for a 54% profit after comissions. Not bad for a quick trade, but wouldn’t want to stay in too long on this one. As they say, (pigs get slaughtered). My next put play will be on VMW.

]]> By: Mark Bohana http://www.stockgumshoe.com/2008/06/blue-chip-forced-by-law-to-embarrass-itself.html/comment-page-1#comment-3333 Mark Bohana Tue, 03 Jun 2008 01:26:17 +0000 http://www.stockgumshoe.com/2008/06/blue-chip-forced-by-law-to-embarrass-itself.html#comment-3333 Daily Reckoning, is a partner of the strategic short report. The following information was provided a few weeks ago. Hope this helps. Lehman Brothers (LEH: NYSE) appears to be among the most vulnerable of all the investment banks. The stock has rallied hard since the Bear Stearns rescue. Because its business model closely resembles that of Bear Stearns, Wall Street thought Lehman was next. And it might have been, if not for the Fed. The Fed instituted a lending facility allowing the investment banks to temporarily swap the ugliest “alphabet soup” assets for Treasuries. These alphabet soup assets — mortgage-backed securities (MBS), asset-backed securities (ABS), collateralized loan obligations (CLO), and others — had been smothering the brokers to the point that Bear Stearns was hours from declaring bankruptcy. In the hopeful words of Lehman Brothers CEO, Dick Fuld, the Federal Reserve’s lending facility “takes the liquidity issue for the entire industry off the table.” Sure, the Fed’s actions may have forestalled a modern-day “bank run” on Wall Street. But the Fed has not solved the bigger, longer-term crisis. The Fed’s new facility allows Lehman to temporarily swap its garbage assets for Treasuries. What it doesn’t do is protect Lehman shareholders from losses on these securities. Lehman shareholders will be the first to absorb these losses. Shareholders are in the most junior position in every company’s capital structure. So the more leverage — or debt — a company employs, the quicker shareholders get wiped out when assets sour. As the chart below shows, Lehman’s equity (in red) supports just a tiny sliver of Lehman’s towering liabilities. Lehman’s gross leverage ratio amounts to about 32 times equity. This means Lehman’s assets can fall only about 3% in value before equity is wiped out: Lehman is scrambling to reduce leverage and raise capital by selling illiquid assets into a weak secondary market. Unfortunately, illiquid mortgage-backed securities aren’t a particularly hot item these days. There are few buyers for such assets — even at steep discounts. According to Bernstein Research, Lehman’s “troubled” residential and commercial mortgage assets amount to nearly three times its tangible equity. That’s danger level for Lehman shareholders. And the danger is growing… Lehman management has not been terribly forthcoming about reporting quarterly losses and write-downs. Brad Hintz from Bernstein Research hinted that fuzzy math produced Lehman’s “strong” March earnings report: “We believe the quality of these earnings was weak, as the firm benefited from a lower tax rate and enjoyed a $600 million mark-to-market gain on its liabilities.” That’s a polite understatement. Believe it or not, accounting rules allow investment banks to book a profit when the value of the bonds they have issued FALL. Follow along with this crazy logic if you can: Because the holders of Lehman’s bonds became fearful that Lehman would declare bankruptcy, the bondholders dumped the bonds at very low prices. Therefore, because Lehman’s bond prices tumbled, Lehman could, theoretically, buy back the bonds at prices much lower than the stated value of those bonds on Lehman’s balance sheet. As a result, this bizarre accounting rule concludes, Lehman can book a “profit” on the difference between the issue price of its bonds and the depressed market prices. Taken to an extreme, Lehman could probably post one if its most profitable quarters ever, just by declaring bankruptcy! Obviously, falling bond prices indicate financial stress, and certainly do not produce sustainable, high-quality earnings. Such “earnings” do not generate cash or create any value of shareholders whatsoever. Net-net, Lehman is still facing the likelihood of losing tens of billions of dollars over the course of the next few years. As losses pile up, Lehman will have to raise capital. That means flooding the market with LEH shares. Lehman may have to issue hundreds of millions of new shares at a discount to rebuild its capital shortfall, severely diluting the existing shareholders. David Einhorn, an accomplished hedge fund manager, recently explained why he’s still selling short Lehman shares. In a speech at the April 8 Grant’s conference, he said that Lehman may have to boost its capital by as much as $30 to $70 billion. If Einhorn’s guesstimate is anywhere close to the mark, Lehman’s shareholders are in for a very rough ride. Daily Reckoning, is a partner of the strategic short report. The following information was provided a few weeks ago. Hope this helps.
Lehman Brothers (LEH: NYSE) appears to be among the most vulnerable of all the investment banks. The stock has rallied hard since the Bear Stearns rescue. Because its business model closely resembles that of Bear Stearns, Wall Street thought Lehman was next. And it might have been, if not for the Fed.
The Fed instituted a lending facility allowing the investment banks to temporarily swap the ugliest “alphabet soup” assets for Treasuries. These alphabet soup assets — mortgage-backed securities (MBS), asset-backed securities (ABS), collateralized loan obligations (CLO), and others — had been smothering the brokers to the point that Bear Stearns was hours from declaring bankruptcy.
In the hopeful words of Lehman Brothers CEO, Dick Fuld, the Federal Reserve’s lending facility “takes the liquidity issue for the entire industry off the table.” Sure, the Fed’s actions may have forestalled a modern-day “bank run” on Wall Street. But the Fed has not solved the bigger, longer-term crisis.
The Fed’s new facility allows Lehman to temporarily swap its garbage assets for Treasuries. What it doesn’t do is protect Lehman shareholders from losses on these securities. Lehman shareholders will be the first to absorb these losses. Shareholders are in the most junior position in every company’s capital structure. So the more leverage — or debt — a company employs, the quicker shareholders get wiped out when assets sour.
As the chart below shows, Lehman’s equity (in red) supports just a tiny sliver of Lehman’s towering liabilities. Lehman’s gross leverage ratio amounts to about 32 times equity. This means Lehman’s assets can fall only about 3% in value before equity is wiped out:

Lehman is scrambling to reduce leverage and raise capital by selling illiquid assets into a weak secondary market. Unfortunately, illiquid mortgage-backed securities aren’t a particularly hot item these days. There are few buyers for such assets — even at steep discounts.
According to Bernstein Research, Lehman’s “troubled” residential and commercial mortgage assets amount to nearly three times its tangible equity. That’s danger level for Lehman shareholders. And the danger is growing…

Lehman management has not been terribly forthcoming about reporting quarterly losses and write-downs. Brad Hintz from Bernstein Research hinted that fuzzy math produced Lehman’s “strong” March earnings report: “We believe the quality of these earnings was weak, as the firm benefited from a lower tax rate and enjoyed a $600 million mark-to-market gain on its liabilities.”
That’s a polite understatement. Believe it or not, accounting rules allow investment banks to book a profit when the value of the bonds they have issued FALL. Follow along with this crazy logic if you can: Because the holders of Lehman’s bonds became fearful that Lehman would declare bankruptcy, the bondholders dumped the bonds at very low prices. Therefore, because Lehman’s bond prices tumbled, Lehman could, theoretically, buy back the bonds at prices much lower than the stated value of those bonds on Lehman’s balance sheet. As a result, this bizarre accounting rule concludes, Lehman can book a “profit” on the difference between the issue price of its bonds and the depressed market prices. Taken to an extreme, Lehman could probably post one if its most profitable quarters ever, just by declaring bankruptcy!
Obviously, falling bond prices indicate financial stress, and certainly do not produce sustainable, high-quality earnings. Such “earnings” do not generate cash or create any value of shareholders whatsoever.
Net-net, Lehman is still facing the likelihood of losing tens of billions of dollars over the course of the next few years. As losses pile up, Lehman will have to raise capital. That means flooding the market with LEH shares. Lehman may have to issue hundreds of millions of new shares at a discount to rebuild its capital shortfall, severely diluting the existing shareholders.
David Einhorn, an accomplished hedge fund manager, recently explained why he’s still selling short Lehman shares. In a speech at the April 8 Grant’s conference, he said that Lehman may have to boost its capital by as much as $30 to $70 billion. If Einhorn’s guesstimate is anywhere close to the mark, Lehman’s shareholders are in for a very rough ride.

]]> By: G IMBURG http://www.stockgumshoe.com/2008/06/blue-chip-forced-by-law-to-embarrass-itself.html/comment-page-1#comment-3332 G IMBURG Tue, 03 Jun 2008 00:34:04 +0000 http://www.stockgumshoe.com/2008/06/blue-chip-forced-by-law-to-embarrass-itself.html#comment-3332 THERE IS A RUMOR GOING AROUND THAT LEH LIED ABOUT THEIR balance sheet and holdings in credit swaps. I dont know if these rumors are true.If they follow the same course as Bear Stearns,It does present opportunity on the downside.To avoid the premium in puts ,sell it short but limit the position size. One could do this on margin. THERE IS A RUMOR GOING AROUND THAT LEH LIED ABOUT THEIR balance sheet and holdings in credit swaps. I dont know if these rumors are true.If they follow the same course as Bear Stearns,It does present opportunity on the downside.To avoid the premium in puts ,sell it short but limit the position size. One could do this on margin.

]]> By: Fran Dilion http://www.stockgumshoe.com/2008/06/blue-chip-forced-by-law-to-embarrass-itself.html/comment-page-1#comment-3331 Fran Dilion Tue, 03 Jun 2008 00:07:21 +0000 http://www.stockgumshoe.com/2008/06/blue-chip-forced-by-law-to-embarrass-itself.html#comment-3331 What do you know about "Unclaimed Dividends" as teased by Stansberry & Associates? What do you know about “Unclaimed Dividends” as teased by Stansberry & Associates?

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