Yes, Lehman USED to have some decent businesses which generated EPS from a highly levered balance sheet. Last week the balance sheet risk was very high, as a virtual "run" on Bear Stearns caused Bear to go away, and the market looked at which bank had the next highest balance sheet risk. Enter the Fed as rescuers, offering unlimited greenbacks to Lehman to keep it solvent in the near term. But is this a long term solution?
The problem is if you save the bank's shaky balance sheet, you sacrifice its income statement. Easy gov't credit has a price, and the price is that it's a trap a bank can't escape. Great, so the gov't has given you a bunch of cash to earn your way out of balance sheet trouble! Where you going to generate the returns? Let's have Lehman explain all the wonderful businesses they will operate to maximize the gov't investment. Long term rates are now high, and looking like they want to go higher. Short term borrowing is entirely unavailable from any entity other than the Fed. All the financials are calling-in all their marks and checks. As soon as the gov't gives out the greenbacks, there's creditors clamoring to get paid NOW. But the real problem is there's no giant industry looking to borrow more money. Housing is dead, corporations and munis are getting charged high rates. The world is trying to eliminate debt, not grow it. so where is a bank supposed to invest this cash infusion? It can't, Lehman can't.
We will have another 2 hours, 2 days, or 2 months of "recovery", then the fear will return as the market realizes banks have no means to make money given the interest rate environment and the borrowing demand from consumers, gov't and enterprise. When this happens, Lehman's negative book value and lack of new sources of earnings will take it where it belongs, which is zero dollars per share for the equity.
$45.68 (03/19/08)
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