Lehman is in the news:
Lehman Brothers Holdings Inc., the securities firm that lost almost 75 percent of its market value this year, sank to the lowest since 2000 in New York trading as customers’ votes of confidence failed to halt speculation that the stock may drop further.
Lehman, once the biggest U.S. underwriter of mortgage bonds, fell 40 cents, or 5.2 percent, to $16.40 before the official open on the New York Stock Exchange. Shares of the New York-based investment bank have lost 24 percent this week.
…
“There’s a concentrated effort to break Lehman,” [Ladenburg Thalmann & Co. analyst Richard] Bove said. “And I can’t say it won’t work because it worked with Bear.”About 70.3 million shares, or 10 percent of Lehman’s outstanding stock, were sold short by investors as of June 30, compared with 37 million at the start of the year, the New York Stock Exchange said yesterday.
| Lehman’s Capital May 31, 2008 |
|
| Item | Billions (except for percentages) |
| Common Equity | $19.3 |
| Intangibles | (4.1) |
| Deferred Tax | (2.3) |
| own debt valuation | (1.5) |
| Other | (0.1) |
| Qualifying unrestricted securities | 7.9 |
| Qualifying Restricted Securities | 4.0 |
| Total Tier 1 Capital | 23.2 |
| Qualifying subordinated notes | 11.6 |
| Total Capital | 34.8 |
| Risk Weighted Assets : Credit Risk | 93.3 |
| Risk Weighted Assets: Market Risk | 91.1 |
| Risk Weighted Assets: Operational Risk | 32.2 |
| Total Risk Weighted Assets | 216.6 |
| Tier 1 Ratio | 10.7% |
| Total Capital Ratio | 16.1% |
| The number above does not reflect the impact of the issuance of $4.0 billion of Common Stock and of $2.0 billion of 8.75% Non-Cumulative Mandatory Convertible Preferred Stock Series Q on June 12, 2008. | |
So what’s the problem? Well, problem #1 is leverage:
| Lehman Brothers Leverage Ratios | |||
| Item | 2008-5-31 | 2008-2-29 | 2007-11-30 |
| Total Stockholders’ Equity | $26,276 | $24,832 | $22,490 |
| Junior Sub. Notes | 5,004 | 4,976 | 4,740 |
| Intangibles | (4,101) | (4,112) | (4,127) |
| Tangible Equity Capital | $27,179 | $25,696 | $23,103 |
| Total Assets | 639,432 | 786,035 | 691,063 |
| Leverage Ratio | 24.34x | 31.65x | 30.73x |
| Net Assets | 327,774 | 396,673 | 372,959 |
| Net Leverage Ratio | 12.06x | 15.44x | 16.14x |
| The table above does not reflect the impact of the issuance of $4.0 billion of common stock and of $2.0 billion of 8.75% Non-Cumulative Mandatory Convertible Preferred Stock, Series Q, on June 12, 2008. On a pro forma basis including those equity issuances, the Company’s leverage ratio and net leverage ratio would have been 20.00x and 10.06x, respectively. | |||
The company states:
The Company believes that a more meaningful, comparative ratio for companies in the securities industry is net leverage, which is the result of net assets divided by tangible equity capital.
The Company’s net leverage ratio is calculated as net assets divided by tangible equity capital. The Company calculates net assets by excluding from total assets: (i) cash and securities segregated and on deposit for regulatory and other purposes; (ii) collateralized lending agreements; and (iii) identifiable intangible assets and goodwill. The Company believes net leverage based on net assets to be a more useful measure of leverage, because it excludes certain low-risk, non-inventory assets and utilizes tangible equity capital as a measure of equity base.
Virtually the entire difference between “Total Assets” and “Net Assets” is due to “Collateralized lending agreements”.
One manner in which they attempt to address the liquidity risk is:
Seeking term funding whenever possible. The average remaining maturity of the Company’s tri-party repurchase agreements, excluding government and agency securities, was 35 days at May 31, 2008, compared with 22 days at February 29, 2008 and 27 days at November 30, 2007. Excluding securities that can be pledged to central banks, the average remaining maturity of the Company’s tri-party repurchase agreements was over 40 days at May 31, 2008.
Conclusions? You won’t find any here! If they were to experience difficulty in rolling their repos, the difference between “gross assets” and “net assets” could become rather important.
[…] has the perverse effect of making no one trust reported capital? Let’s not forget Lehman, which according to Lehman had a very healthy Tier 1 ratio of 10.7 percent on May 31, 2008 and a total capital ratio of 16.1 […]