We ask the question because the news flow surrounding one of Wall Street’s finest seems to get more chaotic by the hour.
The latest, on Friday, pointed to an instant cull of 1,500 jobs at Lehman – about 6 per cent of the workforce. But that’s after three sacking sprees earlier in the Crunch.
What’s noticeable now is the increasingly stark language used by normally reserved (and supportive) followers. Take Patrick Pinschmidt at Morgan Stanley:
Reducing 3Q08 EPS to $(2.80). Our new EPS implies a pretax write-down of $3.5bn, driven by expectation of a significant deleveraging in a deteriorating credit market environment. We believe a key question for investors is not the size of the write-down, but how remaining illiquid asset exposure squares with capital cushion. This will reflect action by LEH to restore confidence in balance sheet marks and its capital position (e.g., potential stake sale, 3rd party venture to manage portfolio). Otherwise, franchise erosion is a real risk. We remain Overweight.
Franchise erosion? The MS man is also worried that even if Lehman convinces regulators it has enough capital, Lehman might nevertheless face calls from the rating agencies to raise more cash:
A scenario resulting in write-downs in excess of $7bn would increase the preferred component in capital structure to north of ~33%, which could necessitate need for incremental equity capital.
And this guy reckons the stock is a buy.
Significant illiquid asset overhang is the key risk to achieving our $31 price target. Downside risks stem from balance sheet overhang being more intractable than we expect, as well as protracted/intensified credit market distress. Additionally, prolonged share price weakness and elevated CDS spreads could impact the firm’s ability to operate in an optimal manner.
Here’s the latest take from Richard X Bove, of Ladenburg Thalmann, another analyst sporting a “buy.”
The company is facing a large number of very unhappy investors and employees. The reason for the upset is that the company may have been too slow to recognize the problems on its balance sheet. Management may have believed that by simply waiting and “”toughing it out” it would be able to deal with its current challenges.
The sharp decline in its stock price and, what I believe is, the real likelihood of a hostile takeover may now be forcing management to deal with its problems. These problems are three fold in nature.
First, it is believed that Lehman must more aggressively write down its commercial real estate holdings; its residual holdings in residential real estate offerings; and its hedge fund investments.
Second, the firm must bring in capital to offset the write downs no matter how dilutive. Third, it must re-establish its relationship with key employees who feel that their incomes have been hurt because they were willing to take Lehman stock rather than cash for their bonuses.
This requires decisive action. The presumed layoff is believed to be the first step toward addressing these issues. More announcements are expected soon.
Shares in Lehman were trading 3.5 per cent lower at just over $15 in morning trade.
Related links
Lehman’s CMBS trouble – FT Alphaville
For Lehman, More Cuts and Anxiety – NYT
Not just leaves – Breaking Views
Private equity groups in running for Lehman unit – FT