Tuesday, September 09, 2008
Lehman on the Brink
First off, I'll say that the odds of Lehman making it to next Monday bearing semblance to its current self are 50:50, at best. Honestly, they are probably lower than that. As the old Wall Street adage goes (paraphrasing), "once you have to defend your financial reputation, you have lost it." Tomorrow at 7:30, Lehman appears prepared to vigorously defend its financial reputation after its 50+% stock price decline from yesterday's early morning peak (immediately after the GSE bailout) of $17.40 or so to today's close of seven dollars and change ($7.79).
First off: wow.
Second off: honestly, wasn't it so obvious that Lehman was in trouble as soon as Bear went down? Aren't they the next logical domino?
I emailed my Little Brother (LB) today when Lehman was somewhere around ten bucks and said, "this feels a lot like March 14th." If you read the email I sent around on March 16th about 30 minutes before Bear was purchased (though penned hours before), so much of the same applies. If you haven't read that post, and I suspect you haven't, please take a few minutes to do so.
If you are a hedge fund manager, it's been a rough year. Long days, sleepless nights. The volatility seems unending. Huge commodity rally. Huge commodity collapse. Financials just keep trending down, but occasionally interspersed are "12 sigma" rallies in the sector. Seems like everyday has been some new pain. Well, let me tell you what ails Johnny Hedge Fund Manager today: he is being pinged by client after client with the following simple question: "what is your counterparty and prime brokerage exposure to Lehman?" Let me tell you what he wants to answer: "zero exposure." Worst case, his response is, "we have some modest amount of exposure that we are in the process of unwinding."
There goes Lehman's liquidity. An institutional run on the bank. Again, I will state: IT DOES NOT MATTER THAT FEDDIE MAC OR TREASIE MAE ARE PROVIDING LIQUIDITY TO LEHMAN, NOBODY IS GETTING PAID TO TAKE LEHMAN COUNTERPARTY EXPOSURE. IN SOME SENSE, HEDGE FUND MANAGERS, ET AL, ARE GETTING PAID TO NOT TAKE LEHMAN EXPOSURE.
Just think about it. If I have some swaps on with Lehman, why on f'ing Earth would I not either just unwind the trade or, since they both claim to be perfectly happy taking Lehman counterparty exposure, novate the trade to JP Morgan or Goldman. Let someone else deal with it. Johnny Hedge Fund Manager is not getting paid for his Lehman counterparty exposure, so he's either already walked or is tying his laces right now.
The more you think about it and the more obvious it becomes. Nothing that any of the dealers or big bank counterparties provide is of anything more than a commodity value. Hedge funds and other investors do not get paid to take counterparty exposure, so they want as little counterparty risk as possible. Period.