It’s no secret that equity analysts tend to be an optimistic bunch, and that they didn’t exactly cover themselves in glory with their forecasts leading into the financial crisis.
Some decidedly egregious examples have now been posted by Economics of Contempt, the structured finance lawyer who recently performed the impressive feat of reading all 4,000 pages of the Lehman Examiner’s report.
We post here a few of the more startling excerpts:
From The Buckingham Research Group on 11 September 2008, four days before Lehman filed for bankruptcy (emphasis ours):
Fundamental analysis dictates that LEH is highly undervalued at $7per share, even if they were to raise highly dilutive capital. In fact, we estimate book value of $23 even if they raised $2.5bn of common equity.
However, fundamental analysis gets pushed aside should rating agencies decide to downgrade LEH materially and Moody’s implied as much last night. While we believe LEH’s capital and liquidity remains solid, even after the spin out of its commercial real estate entity, it does not appear that the rating agencies are willing to give LEH the time it needs to execute its strategic initiatives. And while we strongly disagree with the rating agencies’ stance, perception is reality in this business and a significant downgrade would be very onerous on LEH’s trading business.
From Morgan Stanley on 30 June 2008:
A return to profitability amid a healing credit market should drive valuation close to book value . . . Meanwhile, aggressive Fed moves (i.e., PDCF) and adequate capital cushion should help the firm weather near-term headwinds stemming from balance sheet overhang.
Buy Lehman. After being on the sidelines for a couple of years, we see the current valuation as an extremely attractive entry point into Lehman shares. Furthermore, the recent profitable quarter in a tough environment, the coordinated actions taken by the Fed & Treasury to provide meaningful liquidity, and Lehman’s management team’s excellent track record of creating value and managing risk all serve as excellent downside protection.