What is Lehman doing?
Yves Smith at Naked Capitalism thinks it is one of the most irresponsible financial actions she’s seen in quite a while. “It” being the bank’s remarkable volte face: yesterday morning Lehman was mulling a $4bn rights issue, but by the afternoon – according to the WSJ – it was buying back a huge amount of stock. Smith:
For a firm which is overlevered, rumored to be on the heels of Bear Stearns, with a large short interest, to go out and buy its own shares? This is a ludicrous short-sighted use of scarce funds.
Trading yesterday wiped $1.72bn off the bank’s market capitalisation, with shares down 9.5 per cent by close at $30.61 on the NYSE. That figure could have been a lot worse were it not for the buyback. Shares were at one point down 15 per cent – before a surge in volume accompanied a strong afternoon rally.
The whole mess, of course, has been caused by two big rumours doing the rounds: first, talk of big losses in upcoming results thanks to hedges gone awry, and second, talk of borrowing from the Fed’s investment banking fund window.
The FT today reports that Lehman might have lost as much as $700m on a single hedge. In a report yesterday, the WSJ put total loss through such trades at $2bn. Felix Salmon at Market Movers wonders if this is all a case of history repeating. Bear Stearns, afterall, was stung by a similar hedging failure shortly before it hit real trouble.
Could it be that Lehman, even after seeing what happened at Bear, is making the same mistakes? That it’s trying to hedge its positions discretely, even in market which has systematically slaughtered anybody who’s tried to do that for the past year?
Actually, though, it sounds like Lehman is being hit precisely because it did what Bear did not. Bear Stearns unwound its chaos trades – broad pessimistic bets on ABX indices, short positions on mortgage brokers etc – too early. When chaos really did hit in March, Bear had no protection. Lehman, vice versa, has left them too late.
With some senior series of the ABX resurgent since March, Countrywide CDS tighter (160bp last week alone) and other indicators showing – in the run up to June at least – improvement, those chaos trades are likely earning little, if not actually, losing money.
The second rumour, talk of borrowing from the Fed, was slapped down pretty sharpish by Lehman spokespeople. But it looks like Lehman is borrowing central bank money. From the ECB.
Take the €2.17bn ($4bn) Excalibur CDO of CMBS. Single-A and priced at E+200bp it Is not for sale in the market, but does meet ECB collateral eligibility criteria.
Back though to Lehman’s overall situation: rights issue out the window, Lehman has turned to foreign shores. Private investors are now being tapped for cash – with South Koreans high on the shortlist.
There is likely more pain ahead on the open market too, when trading opens in New York. Bloomberg reports that put options on the investment bank have increased to a two month high.
The Wall Street Journal offers the bluntest advice: Lehman should cut to the chase and offer itself for sale.