High Noon for Fuld, Lehman Brothers

Will the coming week witness a resolution to the crisis and controversy swirling about Lehman Brothers (LEH-NYSE)?

Confusion over the Lehman's capital position and leverage ratios might finally be straightened out; both sides in the debate have been working with numbers and ratios that buttressed their argument, and comparing apples with oranges has added to the acrimony. Last week, shortly after Lehman's $6 billion capital raise was announced, rumors began to circulate that Lehman was discussing an additional capital infusion from various Korean interests, which certainly weighed on the stock as stabilization efforts failed and it traded through the $28 level. Strange days, indeed.

Too, many people apparently have trouble making a distinction between The Blackstone Group (BX-NYSE) and Blackrock, Inc. (BLK-NYSE). Blackrock participated in the capital raise last week and joined the "old guard" on Wall Street in defending Lehman's viability, but a story late in the day Thursday was largely overlooked, and likely responsible for the ramp in Lehman's ramp on Friday':

June 12th 4:49PM
CEO Richard Fuld is actively listening to offers for the beleaguered investment bank, including a possible bid by private-equity firm Blackstone for a 20% to 30% stake, CNBC has learned.

Meanwhile, BlackRock, the publicly traded investment management firm, is not interested in buying Lehman, a source said. CNBC

Lehman's earnings announcement and conference call are the big story Monday on Wall Street; for the second week in a row management is burning the midnight oil in preparation for conference call with its shareholders and the Street.

The weekend meetings are unusual, say people close to the firm. The executives summoned to headquarters include everyone from Stephen Lessing, the head of Lehman private client group to Scott Freidheim, the firm’s co-chief administrative officer. It is unclear if the meetings are related to a possible deal, or just preparation for the Monday’s official earnings announcement, possibly the most important earnings release for Lehman in recent years. CNBC

Cooler heads have certainly not prevailed here; nearly everyone on Wall Street has a strong opinion, and anyone on the other side of your positions is either an enemy for life, a kook, or both. But one thing cannot be disputed; Lehman clearly should have raised capital months ago when its cost of capital was not as prohibitive. They clearly needed capital and liquidity, despite protestations to the contrary, and their miscalculations and indecision have led to a maelstrom.

Half-truths aside, in my book, management’s main transgressions were dragging their feet on the capital raise.  Was it all Erin’s fault? Doubtful, and her fate is still not clear; Maria Bartiromo reported that she has decided to leave the firm and one recent story claimed that she packed up her office and headed straight for her weekend home in East Hampton.

Yet reports continue that she is still with the firm. I am not sure, but apparently she told Fuld it would be in the best interests of the firm if she resigned as CFO; she clearly was frustrated with being caught in the middle, parroting the company line while shorts continued to poke holes in their rebuttals.

Of course, that is irrelevant at this point. We wish her well, but confusion continues to swirl. It is one thing to get tangled up over Level 3 assets, capital ratio calculations and the complicated liability side of the balance sheet, but bloggers and journalists cannot seem to make the distinction between The Blackstone Group (BX-NYSE) and Blackrock, Inc. (BLK-NYSE)

Larry Fink of Blackrock went on the record supporting Lehman, and participated in the capital raise, but ended speculation over further moves midweek. CNBC ran with the Blackstone Group rumor Thursday night, but by mid-day Friday Blackrock rumors were still circulating, as some on the Street continued to confuse the firms.

But as they say, where there is smoke there is fire. While my crystal ball is as cloudy as the weather in East Hampton on Father’s Day, certainly Lehman has options available. And they had better get it in gear, as regulators seem to be sending the brokers a clear message. They will not be regulated like banks, but the temporary lending facilities are about to be pulled, as the borrowing window shuts, according to Undersecretary of the Treasury Robert Steel:

Last Wednesday
Mr Steel stressed that the borrowing window for investment banks was a temporary measure. When asked if the window would remain open beyond its September deadline, as is widely believed on Wall Street, Mr Steel said: “I stressed the word temporary.” FT

John Thain got the memo from his former Goldman partners in the Treasury Department, is exploring option to raise money; a partial sale of Merrill’s stakes in Bloomberg LP and Blackrock Inc could raise $5 to $10 billion, and perhaps more, given they are worth roughly $15 billion combined. Equity analysts need to figure out who can make asset sales, and who needs to raise dilutive equity capital; the stocks of the diluters might be best avoided until capital raising on Wall Street nears an end.

And Lehman has options, too. Few people have discussed their stake in asset management operation Neuberger and Berman. Lehman paid $2.6 billion for the shop in 2003, and with approximately $120 billion in assets under management, the firm today should be worth at least twice what Lehman paid for it.

Blackstone Group has long desired to enter the traditional side of the asset management business, and perhaps they will buy part or all of the operation from Lehman. Unlikely, yes, but an example of one of the cards Lehman has left to play.

Too, many distressed credit hedge funds have recently formed, and might be willing to buy additional assets from Lehman. Lehman, like all of the financials, is a black box, and nobody really knows what lurks within. Lehman bears contend that they have another $10-$15 billion in markdowns to take, and even an outright sale of Neuberger Berman might not be enough to stave off liquidity concerns that might mount as the Fed borrowing facilities go away this Fall.

But the debate over Lehman rages on. Bulls and bears alike might want to read Whitney Tilson’s excellent rebuttal in Seeking Alpha of the recent New York Times piece that was clearly biased, calling Einhorn an Insurgent Investor, which made it sound as if he was riding around midtown with an RPG on a search and destroy mission, trailing Erin Callan around in her famous black towncar.

Bloggers upset with CNBC need to redirect their vitriol toward the other publicly traded entity in Times Square. That certainly was not their only transgression.

In late September, with the Street beginning to figure out how bad things were at Bear Stearns, the New York Times ran an article insinuating that Warren Buffett was close to a deal that would result in him injecting capital into Bear Stearns. The stock rallied sharply from $100 to $120, and Bear was able to quickly price a debt transaction that provided badly needed liquidity.

It was a remarkable example of a journalist being played like a fiddle, and I took the Times to task for missing the real story circulating in Hedgistan at the time, FAS 157.

These debates and battles have long been conducted on Wall Street, quietly, among a small group of combatants. But Wall Street’s Three Amigo’s (Ackman, Einhorn and Tilson) are throwing the debates open to the world at large. Hopping on board their side of the argument is as trendy as driving a Prius, but many old-timers are not counting Fuld out quite yet.

It is High Noon for Lehman, and legends are sure to emerge after the smoke clears.

Criticizing Wall Street’s management teams now is not terribly constructive; the time to do so has passed, although I have been wondering what tune Lehman’s previous, previous CFO is whistling to himself now.

Yeah, I forgot his name too. It sure seems like a long time ago. but it is poetic justice that three of the four executives mentioned in that piece last July are out of work.

Lock and load, as another dramatic week on Wall Street comes into focus.
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Lehman CEO Is Listening To Possible Bids for Bank
CNBC

Lehman’s Weekend Meetings Raise Questions
CNBC

Top Treasury official eases Wall St fears
Financial Times

David Einhorn/Lehman Brothers: Another NYT Hatchet Job
Seeking Alpha
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No position in any securities mentioned above

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