Thursday, June 5, 2008

Cramer: Why Own Lehman?

So, the individual asked, would I buy the stock? I said, "Why the heck would I do that? To catch a 2- or 3-point rally? There is no earnings power at Lehman."

I explained that some stocks are neither longs nor shorts -- that, to me, is Lehman. There's no reason to short it, because I don't think it is going under but many are betting that way, and there is no reason to go long it, because the place is set up for a period of big fees from fixed-income products, from structured products, but clients have at last figured out that they will lose their jobs if they keep buying this nonsense.

LEH? I just don't see how they can deliver $5-6 earnings power anymore. Worse, I can't even figure out what they could earn in this environment. The franchise isn't too dicey, just the earnings estimates.

As a former employee of Lehman Brothers, Lars Toomre is sad to see this investment bank go through its current travails. However, he is a bit surprised that the lessons from when he ran the mortgage structured product trading area have not been passed on. Apparently, Dick Fuld, Joe Gregory and others have forgotten that the true price of what an illiquid security or derivative is worth is where you can sell it to an independent third-party. A trader or desk might think that it is worth X. However, if the only other buyer in the market is willing to pay Y, it really is only worth Y and the difference (Y-X) is a loss. Any price above Y is only worth it if one can find another independent buyer.

The faster that Lehman Brothers and the other investment banks liquefy their balance sheets, the quicker the recovery will be in their economic fundamentals. Another item will be to increase their financial transparency. For instance, one item that Toomre Capital Markets LLC would very much like to see is information on the aging of the trading inventory, particularly with regard to the FASB 157 Level 3 assets. Old "aged" inventory that has not been traded in several months is more likely to be further from its actual liquidation value and (absent severe mark-downs that used to occur at some trading firms) is more likely to produce realized losses vis-à-vis the marks. If those aged positions also are in the Level 3 bucket, one has real reason to question just how accurate the market values of those positions are determined. Source