New Concerns About Lehman Brothers' Liquidity
Tuesday, June 03, 2008SUSIE GHARIB: The financial health of Lehman Brothers was in the spotlight on Wall Street today. Shares of the investment firm tumbled 9.5 percent on growing speculation Lehman needs to raise billions of dollars in additional capital and could report its first ever quarterly loss later this month. In response, Lehman denied rumors it had borrowed funds from the Federal Reserve recently and said it had $40 billion in cash on hand at the end of last month. Erika Miller reports.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Lehman Brothers and other investment banks have been trying to hedge against losses in mortgage-related securities. But according to Sanford Bernstein analyst Brad Hintz, a former Lehman CFO, many of those hedging strategies are failing.
BRAD HINTZ, BROKERAGE ANALYST, SANFORD C. BERNSTEIN: Lehman is probably going to take some losses related to their hedges. Ineffective hedges, these things happen. This time it's happening to Lehman. Last quarter it was Merrill Lynch. I think until we actually clear these mortgages off the balance sheet, all the brokerage firms are going to face this uncertainty. And Lehman happens to be the unlucky one this time.
MILLER: The prospect of more write-downs is a key reason Wall Street analysts have become more pessimistic about Lehman's second quarter earnings due out in a few weeks. According to Thomson Reuters, the Wall Street consensus forecast today is for a $0.07 a share profit. That's a huge drop from the $1.04 expected a month ago. However, some analysts think Lehman will actually report a quarterly loss for the first time in its 158-year history. Many industry experts think Lehman will have to raise about $4 billion in capital to shore up its balance sheet. The big question is how.
HINTZ: Whether they'll do that in the public market, in the U.S. market going to their stockholders or whether they'll do that by going to financial sponsors, the Saudis or a group like that. I think the question is still out on that.
MILLER: Investors were further rattled by comments today from Standard $ Poor's detailing yesterday's decision to lower ratings on Lehman, Merrill Lynch and Morgan Stanley. S&P debt analyst Scott Sprinzen does not expect overall credit conditions to improve dramatically this year.
SCOTT SPRINZEN, CREDIT ANALYST, STANDARD & POOR'S: We don't see that materializing. It's going to be very gradual. We think it could be well into next year before people start feeling that the markets are normal again. It could even be into 2010.
MILLER: However, most analysts do not think Lehman or any other major investment bank is in danger of collapsing, especially because the Federal Reserve now lends directly to those firms.
SPRINZEN: Certainly that is a supportive factor. If they need to, with certain assets, the companies are now able to go and borrow against those directly with the Fed, which isn't something they were able to do previously. So that mitigates some of the concerns that we have.
MILLER: But the fact that the Fed is involved in this at all suggests the magnitude of the problem. The Fed's lending plan officially ends in September although many people think the central bank will extend it. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
