One Year Ago - September 14th, 2008

This time last year I was an equity analyst at Lehman Brothers. As the firm collapsed, I sent a series of notes to my friends and family with my take on the situation. To coincide with the anniversary, I am publishing them here over the next few days. [Photo: Facade of Lehman HQ]
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Lehman Latest
Originally written on September 14th, 2008 12am (Saturday night

Friends and family:

Interesting to see that more and more articles are saying the most likely outcome may be an outright Chapter 7 liquidation of the Firm with the Fed guaranteeing any existing transactions will be paid for the proceeds with some sort of bridge financing that would not cost taxpayers a cent.

This would be a "good-ish" outcome because I'm fairly certain my contract would be legally protected in this scenario as long as the firm has enough assets to cover the payroll, which they seem to have in the attached article:
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From Reuters:
Lehman employees to be paid more than firm is worth
Fri Sep 12, 2008 3:47pm EDT

NEW YORK (Reuters) - Lehman Brothers Holdings Inc is worth less than half the $6.4 billion the bank has set aside to pay employees so far this year.
Shares of the New York-based investment bank were down 8.8 percent at $3.85 in morning trading in the New York Stock Exchange, valuing the company at $2.7 billion, according to Reuters data.

Lehman shares have slumped more than 75 percent this week and more than 90 percent since a 52-week high reached on November 14, 2007, amid growing concern about the 158-year-old investment bank's survival in the credit crisis.
Lehman had 25,935 employees at the end of August. It has recorded $6.4 billion for compensation and benefits expense in its first three fiscal quarters, which includes severance for employees that have been laid off.
(Reporting by Juan Lagorio; Editing by Brian Moss)

Sunday September 14th, 2008, 12:30am (Saturday night) – “More Lehman”

Doubts on Lehman's ability to reach deal
By Francesco Guerrera, Henny Sender and Peter Thal Larsen
Published: September 13 2008 03:00 Last updated: September 13 2008 03:00

When Bear Stearns was rescued by JPMorgan Chase in March, bankers and regulators believed they had stopped the financial crisis from engulfing the rest of Wall Street. Exactly six months later, however, senior executives at Lehman Brothers are preparing for another frantic weekend of negotiations designed to stave off the investment bank's collapse.

Last night, at least two bidders were examining the possibility of mounting a bid for all or part of Lehman. Bank of America, the US lender, has teamed up with JC Flowers & Co, the financial investor, and China Investment Co, China's sovereign wealth fund, to consider a bid. Barclays, the UK bank, was also interested.
The outcome of the discussions is crucial to Lehman as the bank attempts to restore the confidence of counterparties and creditors and to prevent Moody's and Standard & Poor's, the ratings agencies, from cutting its credit rating. However, it is far from clear on what terms Lehman is able to agree a deal - if at all.
People close to the discussions said Lehman's $33bn portfolio of commercial real estate could prove a stumbling block for any deal. Potential buyers could be deterred by fears of further writedowns on the assets, which in turn would depress the value of Lehman's other businesses.

During the conference call that followed Lehman's third-quarter results this week, its executives said the current writedowns of the assets were accurate.
They said Lehman had "stress-tested" its valuations and concluded that only a major collapse in property prices would force a revision.
The book is marked at about 85 cents on the dollar, while its stakes in real estate investment firms Archstone and SunCal are carried at something less than 75 cents on the dollar.

However, those reassurances were questioned by several analysts, who argued that the properties could suffer further falls as the US real estate markets worsened. Potential buyers harbour similar concerns, according to people close to the discussions.

For Lehman's nearly 26,000 employees, the weekend discussions mark the end of a stunning collapse of confidence in the 158-year- old investment bank.
Throughout its recent history, Lehman bankers have praised the bank's cohesive culture and basked in its reputation as a smart, scrappy underdog that was consistently able to defy the odds by outwitting larger rivals.
In 1998, Lehman fought back after Russia's default and the collapse of Long-Term Capital Management, the hedge fund, left the bank nursing heavy losses.
Following the terrorist attacks on the World Trade Center in September 2001, Lehman was forced to evacuate its offices in downtown Manhattan and relocate to a hotel.

Rivals predicted the bank would soon have to sell out to a larger, better-capitalised rival. But Lehman not only survived but thrived as the boom in the credit markets boosted its core fixed-income business.

In the past year, however, Lehman has stumbled badly. Large investments in US commercial and residential real estate left it exposed when the market turned.
At first, Lehman appeared to have weathered the storm in better shape than some
of its rivals. But heavy writedowns triggered large losses in the second and third quarters. As its share price plunged, efforts to raise fresh capital through negotiations with investors, including Korea Development Bank, proved fruitless.

By early this week, Lehman's share price was falling rapidly, prompting executives to bring forward the publication of the bank's results. On Wednesday, Lehman rushed out a survival plan that would involve hiving off up to $30bn of commercial property in a separately listed vehicle and selling a majority stake in the bank's fund management subsidiary.

The move would have enabled Lehman to avoid the need for further writedowns as the new company would hold the assets to maturity. But the plan was all but killed off by the plunge in Lehman's shares on Thursday, which sparked a frantic search for a buyer.

Analysts believe a purchase of Lehman would propel BofA to a top-tier position in investment banking, which it has long coveted but never achieved.
The lure of such a position could prompt Ken Lewis, BofA's chairman and chief executive, to set aside his doubts about expanding in investment banking.
Barclays could see Lehman as an opportunity to expand its Barclays Capital investment banking arm in the US while adding an equities business and a capability to advise on mergers and acquisitions.

But bankers believe Barclays, which recently raised £4.5bn ($8bn) in fresh capital, is unlikely to take on Lehman in its entirety and would need partners with deep pockets in order to compete with BofA.

This leaves the question of what happens to Lehman if it cannot strike a deal. Although the bank has ample liquidity and access to the Federal Reserve's liquidity facility, failure to find a buyer would lead to a further loss of confidence among employees, creditors and counterparties. "In the event LEH is unable to line up an acceptable strategic solution and is downgraded to the triple-B category, there would likely be severe ramifications to the firm," said Brian Zinser, an analyst at Merrill Lynch. "Liquidity would be impacted by less borrowing capacity and collateral postings under counterparty arrangements."
Copyright The Financial Times Limited 2008

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