Bank Collapse Update: $400 Billion of Writeoffs So Far, $600 Billion to Go (WM, WB, JPM, FNM, FRE)

Henry Blodget|Jul 25, 08 12:51 PM

ClusterStock.com

America's financial institutions insist they have enough capital. More and more analysts violently disagree.

For example, NYU professor Nouriel Roubini (who predicted this whole debacle), PIMCO bond guru Bill Gross, and Invesco strategist Diane Garnick all think that banks will have to write off $1 trillion of losses before the credit crash is through (and Diane and Nouriel think this is a floor).

What happens if these analysts are right and bank managers are wrong? The banks will have to take about another $600 billion of writeoffs on top of the $350+ billion they've already booked. What happens if that happens? Most of the banks will need to raise more capital, not all of them will be able to do so, and many will go bust. Even the ones that are able to raise capital, meanwhile, will dilute the hell out of current shareholders.

No wonder, then, that the stocks of Fannie Mae (FNM), Freddie Mac (FRE), Wachovia (WB), Wamu (WM), et al, have once again started marching toward zero.

Below, Nouriel Roubini and Diane Garnick discuss their apocalyptic views with me and Aaron Task on Yahoo TechTicker--views that are rapidly becoming consensus.

Related Posts :

1. Lehman (LEH) May Sell Neuberger In Emergency Cash Raising Move
2. WaMu Has $3.3 Billion Quarterly Loss on Rising Delinquencies
3. Regional Banks Collapse Snow Ball Seems to Continue Rolling Downhill
4. IndyMac Bancorp (IMB) Filling for Chapter 11 Bankruptcy

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

Lehman (LEH) May Sell Neuberger In Emergency Cash Raising Move

Bloomberg today, wrote:

Lehman Brothers Holdings Inc(LEH). may sell at least part of its Neuberger Berman asset management unit to raise as much as $8 billion, CNBC reported, citing people it didn't name. A sale of the unit may make it difficult for Lehman, the smallest of the major Wall Street investment banks, to compete as an independent company, CNBC said. Last month, Lehman reported a $2.8 billion second-quarter loss, its first since the company went public in 1994.

Lehman Brothers Holdings Inc. acquired Neuberger Herman Inc, on July 28 2003, for about $2.63 billion. Under the terms of the agreement, Lehman Brothers will pay about $41.48 per share, consisting of $9.49 in cash and 0.496 shares of Lehman common stock.

Heidi N. Moore from Blog The Wallstreet Journal, on July 9, wrote:

In fact, the asset-management business is Lehman’s biggest safety mechanism against the brutal markets. Consider that the asset-management business is valued at about two and a half times as much as Lehman’s investment banking business, according to one analyst’s estimates. Lehman Brothers asset management alone is worth $8 billion if it is valued the same as its peers using a multiple of 20.1 times the share price to trailing-earnings since 2000, wrote David Trone of Fox-Pitt Kelton Cochran Caronia Walker on June 13. That $8 billion is pretty considerable when you consider that all of Lehman had a market value of about $13 billion when the report was written ($11.5 billion as of Tuesday). It means the core Lehman businesses–investment banking, fixed-income and equity–was valued at only about $3 billion. Combined. (The remaining $2 billion in Trone’s valuation of Lehman comes from the high-net-worth brokerage business–the guys who sell Neuberger Berman’s funds, among others.)

Without its asset-management business, Lehman could be scooped up for the price of a larger bank’s pocket change. So by selling Neuberger, Lehman would be signaling it wants to give up its independence and take a bargain-basement price for the rest of the firm.

Other reasons that Lehman should keep its asset-management business? Take a look at the reasons it paid $2.6 billion for Neuberger Berman in the first place, back in 2003. At the time Lehman was looking for more stability in its earnings, which were highly dependent on the capital markets. Lehman also wanted to give its small group of high-net-worth brokers–400 at the time–a way to sell in-house funds, instead of just mutual funds founded and managed by other firms. If Lehman’s high-net-worth clients bought Lehman funds, Lehman could capture more fees.

By many measures, Lehman’s acquisition of Neuberger fulfilled those expectations and more. Lehman, which had barely any assets under management before Neuberger, added $67 billion of assets under management through the 2003 deal. Now the Neuberger portion of Lehman Brothers Asset Management can claim about double that. Lehman Brothers Asset Management remains focused on high-net-worth individuals, which represent one of the few growing areas in the world of running money. Lehman has been adding to Neuberger through acquisitions: it acquired leveraged-loan manager Lightpoint in 2007 and is in the process of acquiring $2 billion New York money manager David J. Greene. There still is room for growth, as the brokerage house has long had its eye on overseas expansion in asset management. And, as recently as two years ago, Lehman bankers drove clients to Neuberger Berman to the tune of another $3.5 billion of assets under management, executives said at the time.

According to ClusterStock.com, Credit analysts suggest that because the unit is so profitable and is such a reliable source of income that offloading it might negatively affect Lehman's credit ratings.

Yesterday, July 24, Reuters wrote:

Lehman, the smallest of the major Wall Street investment banks, has raised about $12 billion of capital this year to strengthen its balance sheet, sold off assets, and shaken up top management.

The analyst said Lehman's current illiquid asset inventory of $83 billion includes residential mortgages of $24.9 billion, commercial mortgages of $29.4 billion, real-estate held for sale of $10.4 billion, non-investment grade acquisition finance facilities of $11.5 billion, and non-mortgage asset-backed securities of $6.5 billion.

However, Lehman is able to borrow at the U.S. Federal Reserve's so-called discount window. This had not been the case in March when smaller Wall Street banking rival Bear Stearns Cos collapsed, eventually agreeing to a takeover by JPMorgan Chase & Co (JPM.N: Quote, Profile, Research).

"Aggressive Fed moves and adequate capital cushion should help the firm weather near-term headwinds stemming from balance sheet overhang," Pinschmidt said.

Finally, I copy a part of The Financial Ninja Blog's Opinion, it may be also his conclusion:

This is the same Lehman Brothers (LEH) that absolutely swore that they didn’t need to raise any additional capital as recently as a couple of weeks ago…

Anyways… Selling Neuberger Berman means the following:


1. Lehman really does need to raise capital, and lots of it.
2. Lehman actually tried to quietly raise capital, and failed.
3. Lehman is now left with no other option but to sell assets.
4. Lehman will have to sell the ‘good stuff’ and keep the ‘bad stuff’.
5. The end result will be a smaller, weaker Lehman.
6. Therefore Lehman can’t survive as an independent entity.

This should help put an end to the carefully orchestrated short covering rally in financials in general… Time to Go Ultra-Short, Again.

Related Posts :

1. Lehman and Merrill Lynch Default Risk Charts
2. Lehman Lying, Its Crush, and David Einhorn’s Winning
3. Lehman: Death Spiral?
4. Total Write-offs Stemming from the Credit Crisis may Total $1.3 Trillion
5. Banks and Brokers at Greatest Risk of Default
6. Why John Paulson Is Still Bearish On Financials [Housing Tracker]

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.