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June 3, 2008

Could other investment banks be on the brink of insolvency like Bear Stearns?


"Rumors that Lehman, which is making strides to diversify its fixed-income-driven business, may need to raise capital are corroding its stock, and increasing the cost of hedging Lehman's equity and debt.

A Lehman spokeswoman would not comment on the investment bank's capital needs, but the market is speaking loud and clear. The message from investors is that Lehman is in trouble. Again.

Even though Lehman can borrow money from the Federal Reserve's discount window, articulate and precise critics have cast enough doubt on Lehman's operations, ineffective hedges, and capital position to create a bull market in bearish put options that would increase in value should the $32 stock pull a Bear Stearns.

Everyone remembers that Bear Stearns assured investors that it was in a stable financial position right before it became clear that it wasn't.

"Is Lehman's CFO, Erin Callan, on her way to becoming the next Alan Schwartz?" mused Jon Najarian, co-founder of optionmonster a trading advisory firm, referring to when Bear Stearns' chief executive declared Bear Stearns "financially sound hours before the investment bank/broker nearly went into liquidation in March."

Bear Stearns has since become a prominent tombstone in the subprime crisis, and part of J.P. Morgan Chase (JPM) which rescued Bear from failure. Najarian's view of Callan and Lehman may be harsh, but it neatly expresses investment sentiment toward Lehman. Once more, this investment bank is in a treacherous position.

If Lehman announces to investors that it is raising $3 billion to $4 billion to enhance capital, it will prove its critics right and set the stage for another showdown. Lehman has effectively asserted that it is OK, and if it raises capital Lehman will seriously enhance the credibility of critics, and dilute management's credibility at the very time it needs to be believed in the market.

Yet if Lehman needs to raise capital, and does not raise the money, this public-relations problem may prove to be the least of its worries."

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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