Markets Send Paulson a Message as Financials are Routed
Hank Paulson's vague plans to rescue Fannie and Freddie were met with a thumbs down today as financial stocks skidded to new lows across the board:
U.S. stocks fell, sending financial shares to their biggest drop in eight years, on heightened concern that bank failures will spread.
Washington Mutual Inc. posted the steepest retreat ever and National City Corp. tumbled to a 24-year low after last week's collapse of IndyMac Bancorp Inc. spurred speculation that regional banks are short of capital. The companies said they've seen no unusual depositor activity. Fannie Mae and Freddie Mac erased an earlier rally fueled by Treasury Secretary Henry Paulson's plan to help rescue the largest U.S. mortgage lenders.
The declines pushed the Standard & Poor's 500 Financials Index of 89 companies down 6.1 percent, its steepest plunge since April 2000. Bloomberg
The relentless selloff is taking a toll, the usual suspects like Bill Miller and Richard Pzena had bad days as the stocks of their employers skidded to 52-week lows; the value investing complex continues to suffer from a web of interconnected holdings that are being pummeled as redemptions result in selling and shorts gun for the weak hands. The "cult of value investors" is being severely tested; eight years of outperformance had resulted in a very crowded trade.
Yes it is a beatdown of legendary proportions. Fox-Pitt analyst David Trone, who several weeks ago called David Einhorn’s short thesis on Lehman Brother “flimsy”, claiming Einhorn was right for the wrong reasons, has seemingly thrown in the towel and now recommends Dick Fuld should take the brokerage firm private:
``Lehman’s best course of action would be a `going private’ transaction, since it is the public equity markets that are the threat to the company’s survival,’’ Trone wrote in a note today. ``Without a public stock, there would be no shorting, thus no motivation for rumor-mongering, thus no source to spook the counterparties and creditors.’’
Lehman, which has a market capitalization of $8.6 billion, should be bought for 25 percent more than its shares are trading, Trone said. The shares fell as much as 15 percent today, sliding for a fourth day, amid concern bank failures will spread. The shares lost about 37 percent of their market value last week on speculation mortgage buyers Freddie Mac and Fannie Mae might fail. Lehman spokesman Mark Lane declined to comment.
``This would eliminate the disconnect between Lehman’s true financial condition and current stock price by eliminating the run-on-the-bank discount in the process of the buyout,’’ Trone wrote. ``This value-release would be big enough to avoid the need for leverage.’’
With the value of the firm’s Neuberger & Berman subsidiary within spitting distance of Lehman’s current equity market cap some sort of financial engineering might not be so far-fetched, and perhaps the partnership model, which served Wall Street so well for so long, will be resurrected.
Having your own capital and net worth on the line keeps the dice rolls to a minimum, as the good folks at William Blair, one of Wall Street’s remaining partnerships, can certainly attest.
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Who is in charge here?
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U.S. Stocks Fall, Led by Biggest Drop in Financials Since 2000
Bloomberg
Lehman Should Go Private, Fox-Pitt’s Trone Says
Bloomberg
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