The fourth largest US investment bank raised $4 billion in new capital (we used to call them brokers, but that moniker is considered demeaning nowadays). Markets cheered, but should they have? Let's look at the terms of the transaction...
Preferred shares paying 7.25%, convertible at any time into 20.05 shares of common stock, i.e. at a conversion price of approx. $50 (the stock closed at $44 yesterday, up 18%). That's 80 million potential new shares vs. 550 million common outstanding, or 14.5% potential dilution. By comparison, the common pays a 1.5% dividend at current prices and - lest we forget - Fed funds are at 2.25%.
Measured by any yardstick you wouldn't describe these terms as "favorable" to the seller. And they claim that they really didn't need the money, but raised the capital essentially to prove that the market still loves them (press release).
Terms of endearment, indeed...
Measured by any yardstick you wouldn't describe these terms as "favorable" to the seller. And they claim that they really didn't need the money, but raised the capital essentially to prove that the market still loves them (press release).
Terms of endearment, indeed...
Hell,
ReplyDeleteIf they had just borrowed the money on the Junk bond markets (assuming they would have found investors), what kind of rates do you think they would have been given?
It's obvious nowadays that virtually any lie, even one as stupid as LEH's, will pass without scrutiny.
ReplyDeleteIt's not so much lies passing without scrutiny, as the players' profound - some would even say desperate - desire to believe it is true.
ReplyDeleteHere's why: given the level of media coverage of "recession" and the negative sentiment evident in the bad economic numbers, in other times this would be close to a market bottom, give or take. So we have people WANTING to believe this is the case this time, too. Because if it isn't, then they will know that the economy is in much worse shape than they admit..
A sort of double-think for sure, but it is common in markets.
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ReplyDeleteBecause today's post was not universal enough to me (but thanks again for this blog!) let me tell you a story that is not known enough.
In the south of France the biggest international cooperation started by mankind during peace times was launched at the end of 2007. After already about 50 years of fundamental research, China, Europe, India, Japan, Korea, Russia and possibly the USA started a multi-billion dollar project to prove that thermonuclear fusion will be a usable and relatively clean source of energy for many hundred of years to come.
If it works this would secure today's social organisations for a long time to come.
However can you imagine what happened in December 2007? The USA decided to nearly suspend their part of the funding for 2008.. When you, Americans, should have launched the same sort of race as in the 1960's, when you decided to go and visit the moon within 10 years. How sad!
Moreover what a risk for the future you take! As I am sure that this technology, if it works, will not be given away for free from the riches to the poors of this planet ;-)
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Re: fusion power
ReplyDeleteI think we can get by very nicely, indeed, with the fusion going on someplace else, i.e. the Sun. Why bother recreating it here at horrible cost, when the Sun's fusion power falls on our planet for free?
Notice, however, the key word: free. This is entirely antithetical to all complex politico-economic systems that have been devised by man since at least after the Ice Age. Capitalism, communism, socialism, imperialism.. they all depend on a centralized nexus of power, sometimes called "representative democracy", that is a mirror of the control of energy/food resources.
A totally decentralized, uncontrolled energy regime would totally upset this applecart and create a very different social system. It would act as a sort of socio-economic class steamroller.
"Normally, the market sorts out which companies survive and which fail, and that is as it should be," Bernanke said. "However, the issues raised here extended well beyond the fate of one company."
ReplyDeletehttp://www.reuters.com/article/bondsNews/idUSN0236699720080402
Why bother just set all prices by government decree.
The FED and the Gov't have this insane belief that image and perception by the sheeple is all that matters. That real income and wages don't really matter just positive news that all is OK to spend more and spend, more will somehow will keep the financial sector alive.
ReplyDeleteRe "A totally decentralized, uncontrolled energy regime..."
ReplyDeleteYes I know that this is the real solution since as a teenager (about 30 years ago) I read a sci-fi novel about a society based on enough individual sources of energy for all of us. But the subject of this book was that our elite hate this idea, as it would delete their power on us.
Maybe you had read that novel as well? But I don't remember its title :(
What I also wanted to point to: the near cancellation of fundings for a project that has the potential to save today's social organisations by the US government is a new clue that the situation is _really_ serious!
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I've been hearing more specifics on the terms of the deal. Pretty interesting stuff. They basically did the offer in such a way as to engineer a massive short squeeze. UBS did the same.
ReplyDeleteI'm hearing the Street worked together to make both LEH and UBS 'hard to borrow' just in the nick of time.
World Recession and the Perfect Short Squeeze
I read an article a few months ago by a researcher at Lehigh U. working on fusion. His fondest hope was that he would live long enough to see fusion become viable and he is only in his mid 30's and, judging from the picture, in robust health. We shouldn't hold our breath.
ReplyDeleteHellasious said...
ReplyDelete"Notice, however, the key word: free. This is entirely antithetical to all complex politico-economic systems that have been devised by man since at least after the Ice Age. Capitalism, communism, socialism, imperialism.. they all depend on a centralized nexus of power, sometimes called "representative democracy", that is a mirror of the control of energy/food resources.
A totally decentralized, uncontrolled energy regime would totally upset this applecart and create a very different social system. It would act as a sort of socio-economic class steamroller."
You know I like to philosophize on this kind kind of stuff: 'yes', I agree it would definitely shake things up, but things all settled down (might be several generations) things would look prety much as they do today.
Remember Oxygen is essentialy 'free' (we take so much for granted) but is just as essential for life as energy (really it is a form of stored energy). But even though it is 'limitless' right now (and therefore not a system bottleneck), still we have the current system we have.
Changing our energy system
would ultimately mean society would just move on to the next economic 'bottleneck' (whatever that might be) and we would all start fighting all over again.
We live in a fractal world indeed, only most of us don't see it.
Excellent analysis and we thank you for it.
ReplyDeleteI was looking for someone put the details together just like that, and it came out exactly as I suspected. LOL.
Great blog
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ReplyDeleteThis morning the french informations radio announced the end of the financial crisis.
After french magazine Challenges did it.
And in there you find an interview of Mr. Patrick Artus, chief economist at Natixis (yes, the bank linked to the CIFG insurer!) who confirms. Apparently he comes back from the US where all major actors told
... him that this is the effect of the Bear Stearns bailout and Freddie Mac and Fannie Mae by the Fed and the Federal Home Loan Banks. This action thanks to Ben Bernanke who accepted to transform the Fed from lender of last resort to stock holder of last resort.
ReplyDeleteHere the interview with a cute picture of our new modern heroe (for how long, I wonder?)
Ah yes: this end of the financial crisis thanks to the US tax payers does not mean the end of the economic crisis which will now spread out. But the stock markets are safe!
Who does believe this???
Hell,
ReplyDeleteI emailed the head of my department (Department of Finance, Miami University) asking him the same questions you posed here, I'd like to post the response he sent me and have your comments if you're still around:
--I basically asked him why Lehman was giving investors such a great deal on convertible preferred's if they didn't "have" to, and threw in some of the numbers you came up with--
"The price of liquidity during a liquidity panic is high, and the relevant comparison would be to the high-yield bond that Lehman did not offer today. Preferred stock is the lowest priority security next to common itself. So if Lehman could sell a subordinated junk bond then it would have yielded maybe 600-900 bps (just a guess based on high yield spreads) over treasuries. So the convertible part has taken maybe 200-400 bps off the yield on such a low priority bond.
By the way, the real signal here is demand and not price. Reportedly the offer was 3-times oversubscribed and it is this signal that suggests that some investors are OK with Lehman's future. What I would want to know before I took a big position in this would be who else was buying this CVP. If this is just a bunch of noise traders, then I would be less impressed with the oversubscription. If it were some of the more savvy private investors, then this is a great signal.
Something else happens from this point forward. The security to own if you want to have an equity stake in Lehman, is clearly this CVP. It is a "super-share" - has all the up-side of the cheap (if Lehman survives) stock and strong cash flow in the form of a dividend. OF course there is a parity relationship between common and this CVP, but it is a two-way play on Lehman and on high yield bond spreads in general. Usually this second play is missed by the software that most traders use to value CVP since they mainly use standard models that don't include such finer points."
thoughts?
To Miami finance,
ReplyDeleteI beg to differ. A junk bond is irrelevant in this case because what was necessary was equity capital, not debt. So the better comparison is with the common.
We do not know who bought the shares, but I would be very surprised if they didn't include several "directed" portfolios from other brokers, in order to make a show of solidity and thus benefit themselves from the positive result (market turnaround). Over-subscription under such circumstances means nothing - indeed I view it as HIGHLY suspect.
I also wouldn't be surprised if large and active LEH shorts bought the issue as a hedge/arbi opportunity.
Regards,
H.
H.
ReplyDeleteI agree that “I wouldn’t be surprised if large and active LEH shorts bought the issue as a hedge/arbi opportunity.”
Suggestion for the next trade - go long the convertible and short the common stock ???
Regards
Dome
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ReplyDeleteOne more remark not related to your post about Lehman.
There are 1500 comments after this blog entry about the end of the auction rate "securities" market.
It seems that individual US citizens have many billions of dollars (same order of magnitude than the stimulus package announced in January by your government) frozen because of the end of this market.
I believe that the people who feel robbed are in the middle and upper end of the middle class. To say that they WILL be able to organize if/when there will be enough of them. Their problem today is that many still are not aware that their money will be unavailable possibly for the next eternity due to some fine prints in the contracts they signed...
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And the last -frightening- comment (at this time) here about this ARS mess
ReplyDelete"Just an FYI - We talked to UBS today - we were told that they own $11B of this on their B/S and that they are estimating that ML has $24B. The issue is that when / if the issuers start finding solutions, you can bet your 7 figures won't get in line before their 11!
Also, several of you referenced leaving the big firms. Where are you going. It seems like everyone is involved in this thing."
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Thai Mc wrote,
ReplyDelete"We live in a fractal world indeed, only most of us don't see it."
Yes, you keep reiterating that. Sorry, I couldn't resist.
Fractals made me do it.
Edwardo said... "Yes, you keep reiterating that. Sorry, I couldn't resist.
ReplyDeleteFractals made me do it."
LOL!!!
Regards
:)
You have the ability to get psp games, no matter how old or new. They also make sure to give you the right software and detailed directions on how to download and transfer your games to PSP. I was really lucky I was able to find them.
ReplyDelete