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Lehman: Contrarian View

By Reuters -  |  Posted 2008-09-11 Print this article Print

Lehman -- founded in 1850 by three German immigrants who traded cotton -- has garnered the most attention of all the financial sector stocks that are suffering, and the company appears to be scrambling to rebound quickly. Lehman reported a record quarterly loss of $3.9 billion, and said it would spin off distressed assets and sell a stake in its asset management business.


The Lehman worries were not just affecting the stock. Its credit protection costs soared to a record, and some of its bonds traded near distressed levels.

Lehman's bond prices tumbled, sending some yields well above levels widely considered as distressed. Its 4.25 percent notes due in 2010 were yielding nearly 22 percentage points more than Treasuries -- more than twice the level that traders consider distressed -- according to data from MarketAxess.

Five-year credit default swaps traded at 768 basis points Thursday, or $768,000 a year to protect $10 million of debt, widening 188 basis points from Wednesday's close, according to CMA DataVision.

On the commodities side, nervous futures clients of Lehman were pulling out their money. Lehman lost 22 percent of its Futures Commission Merchant assets last month, data from the U.S. Commodity Futures Trading Commission shows.

"CFTC data confirms clients are pulling assets," JP Morgan equity analysts said in a research report late Wednesday.

But not everyone on Wall Street was ready to bury the firm.

"I would tend to want to bet in opposition: that Lehman not only survives, but that it certainly has a business model that works, excluding some of the stuff it used to have," said Robert Albertson, chief investment strategist at Sandler O'Neill & Partners.


Lehman's growing problems have led to questions about CEO Fuld and his strategy to get the firm on more solid footing.

"What you have is a loss of confidence in management, and they've got to start doing things instead of saying they're going to do things." said William Smith, president of Smith Asset Management in New York. "I'm in shock as to how Fuld let this get away from him. From what I understand, the guy was a great executive for three decades."

Fuld won a reputation as a survivor and top-notch leader since coming to Lehman as a trader 30 year ago. He endured in-fighting that led to the company's sale to Shearson/American Express in 1984 and was running Lehman when it was spun off -- undervalued and unwanted -- in 1994.

Fuld was considered one of Wall Street's ablest CEOs and was also one of Wall Street's best paid. In most years, he took home bonuses on par with those paid at much-larger rival Goldman. Last year, he received $22 million in compensation.

"Historically, Fuld has been someone you don't bet against when times get tough. This time, things may be too tough," said Holland. "The stock price is saying that."


Goldman downgraded Lehman to "neutral" from "buy," and removed the stock from its Americas buy list Thursday.

"Management did not successfully put to rest the issues that had been pressuring the stock," William Tanona of Goldman wrote.

Oppenheimer's Meredith Whitney said Lehman's initiatives were a "step in the right direction," but she continued to expect a tough 2008 for the investment bank.

Lehman faces challenges to earnings, given difficult capital markets for the next several quarters and potential write-downs of its remaining risk exposures, Whitney said.

(Reporting by Joseph Giannone, Doris Frankel, Jonathan Spicer, Elinor Comlay, Alden Bentley, Dena Aubin, Sweta Singh, Juan Lagorio, Dan Wilchins, Walden Siew and Ellis Mnyandu; Editing by Steve Orlofsky and Jeffrey Benkoe)

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