Many of Lehman's clients, while maintaining support for the firm publicly, are moving behind the scenes to reduce their exposure to the firm, the WSJ reports.
For many Lehman counterparties...there was an acknowledgment that they had to guard themselves as the firm's share price continues to fall, even as they wished to support Lehman and its employees...
Chief on some traders' minds was Lehman's credit rating, which is in increasing danger of a downgrade as its shares continue to slump. Lehman's current ratings are already at the threshold of what most trading partners and clients will tolerate for an investment bank, at single-A.
...Meanwhile, some firms that face Lehman in credit-default swaps are trying to unwind their trades or get other investment banks to take over their positions, say people familiar with the matter. Others are seeking safety by buying credit protection against a Lehman default. On Wednesday, the annual cost of insuring $10 million of Lehman debt for five years rose to a high of $610,000, versus $475,000 late Tuesday, according to Phoenix Partners Group.
If one or all of the credit ratings slash Lehman's rating, LEH says it could have to post as much as $2.9 billion in collateral. That's $2.9 billion that Lehman can't spare. Lehman will have access to Federal Reserve lending facilities created after the Bear Stearns collapse, but this won't stop clients from taking their business elsewhere.
In other news, Goldman analyst William Tanona finally downgraded Lehman (LEH) from Buy to Neutral. Tanona cites Lehman's massive Q3 loss, as well as management's continued refusal or inability to address any of the market's concerns about the firm's precarious capital position and real estate exposure. Tanona airs his frustrations with Fuld and Company:
Maintaining our Buy recommendation on Lehman Brothers over the last couple of months was predicated on our belief that management would work aggressively to enhance its capital position and improve its balance sheet by dramatically reducing its overall mortgage exposures – initiatives we believed, if executed properly, would result in a significant revaluation in the firm’s multiple. Although it achieved this to some degree, today’s announcement fell short of what was necessary to lessen the bear case on the stock. At this juncture, there is too much uncertainty around Lehman’s future strategic initiatives to recommend the shares.
Tanona was unimpressed by Lehman's announcement that it would sell a majority stake in its investment management business. Nor was he impressed with the announcement that LEH would sell (or try to sell) its commercial real estate assets:
Management’s resolution, the complexity of the transactions and the lack of details around pricing did little to boost the market’s confidence. Furthermore, commentary from some of the ratings agencies and the movement in the company’s credit default swaps suggest risk to the firm’s ratings, which would increase funding costs.
Tanona cuts target from $22 to $7.
See Also: Richard S. Fuld, Lehman (LEH) CEO, 1994-
A Fuld And His Money
