One on One with Richard Bove of Ladenburg Thalmann
Wednesday, September 10, 2008
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SUSIE GHARIB: What's next for Lehman Brothers? Joining us now with his analysis, veteran banking analyst Richard Bove of Ladenburg Thalmann. Hi, Dick. How are you doing?
RICHARD BOVE, BANKING ANALYST, LADENBURG THALMANN: Good, Susie.
GHARIB: All right. So, does Lehman survive or does it go out of business?
BOVE: I think the company survives. I think it will be here 50 years from now, but I honestly believe that a hostile takeover is quite likely in this situation.
GHARIB: A hostile takeover? Why do you say hostile?
BOVE: Well, because Dick Fuld, the CEO of the company, got up and made his presentation today. He tried to make it a powerful presentation. He tried to convince the market that his company had the equity, had the liquidity, was able to function in the marketplace. But clearly he failed to achieve his goal. He did not convince investors that the company was in sound condition because the stock, toward the end of the day, started to plummet. And I believe it's going down in after-market trading. So it would seem to me that you need to get a management team in there that can provide credibility to investors. And I don't think that's going to come from internally.
GHARIB: Who could buy a Lehman? What banks, for example, or private equity firm, is in a position to buy Lehman?
BOVE: Well, first off, it's very cheap, right? In other words, the 700 million shares outstanding and the price of the stock is roughly $7.25, so the price of this company is under $5 billion. And that means just about any private equity firm worth it's -- what have you, is able to do it. And I think that a number of them are taking looks at Lehman. I think companies like Lazard (LAZ) or Greenhill (GHL) who know how to structure deals of this nature might be interested. I think Bank of America (BAC) would be interested. I think the Canadian banks, the Japanese banks, you know, would show some degree of interest, because Lehman Brothers, despite all of its difficulties, is still a first rank underwriter in the United States and around the world. And it's, I think, a very high quality company.
GHARIB: And yet there's still speculation that the Federal Reserve might not come to the rescue of Lehman. This might be the one that the Fed lets it go down just to show to everybody that it doesn't bail out everybody. What do you think about that?
BOVE: Well, I think it would be a horrible thing if the Federal Reserve came to bail out Lehman Brothers. I think the time for the Federal Reserve or the Treasury stepping in to bail out financial institutions hopefully is over. These companies have got to solve their problems on their own in the private sector without the assistance of the government. And I think it's very possible for Lehman to do that because, remember, Lehman has $42 billion worth of liquidity, or enough money to take care of its cash obligations for the next 18 to 24 months.
GHARIB: Dick, next week we get quarterly results from Goldman Sachs and from Morgan Stanley. What kind of shape are they in?
BOVE: Well, I mean, the earnings are going to be terrible, right? I think that we're well aware of the fact that just about every core business that these companies operate in, whether it's trading fixed-income securities, equities, whether it's underwriting new issues, whether it's mergers and acquisitions, whether it's getting performance fees on investment management, all of it is just terrible. There's no decent amount business coming from any area. So I think next week it would be a surprise if either of those firms showed us decent earnings. They're going to have very poor numbers.
GHARIB: You know, Dick, it has been quite a week for the financials this week. You know, we've had the news about Fannie (FNM) and Freddie (FRE). You know, this news now about, you know, the questions about Lehman's future, speculation about what happens to Washington Mutual (WM). What does all of this tell us about the health of the American financial system?
BOVE: Well, it tells you that that portion of the financial system that is associated with the housing/mortgage market is in deep trouble. I think that all of the firms that you've mentioned are associated with the mortgage market. Clearly Fannie and Freddie are. Lehman is. Bear Stearns was. You know, Washington Mutual is the biggest thrift in the United States. So all of the issues that are arising to create these problems are in the mortgage sector. If you look beyond the mortgage sector to the total banking industry, the second-quarter numbers showed pretty clearly that there's more equity, there's more reserves in the industry, that deposits are at record levels, loans are at record levels, and margins are increasing. So you have on one hand this bipolar -- well, you have this bipolar industry. On the one hand, you have these tremendous loan-losses and these horrible stories coming out of these companies, but on the other hand, the core business of the industry is very healthy.
GHARIB: All right. Well, fascinating. And that's a positive note to end off on. Dick, thank you so much for coming on the program.
BOVE: Thank you, Susie.
GHARIB: My guest tonight: Richard Bove, bank analyst at Ladenburg Thalmann.
