Lessons from the house of Lehman
What can we glean from Wall Street's current soap opera?
By Allan Sloan, senior editor at large
Last Updated: June 23, 2008: 7:57 AM EDT
Lehman Brothers CEO Richard Fuld
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(Fortune Magazine) -- Lehman Brothers, a firm with a storied past but an uncertain present, has turned into Wall Street's latest drama - a modern-day financial version of the "Perils of Pauline," the famous damsel-in-distress flick. At this point in the Lurches of Lehman, we aren't certain whether chief executive Dick Fuld will become Wall Street's latest human sacrifice or whether the firm itself will survive or in what form. But even with the drama still ongoing, here are a few things to think about the Lehman mess.
The rich get richer, no matter what. When you look at Fuld's compensation package, you have to laugh at the idea that giving CEOs big slugs of equity aligns their interests with those of regular shareholders. Lehman's stock was down some 60% for the year as Fortune went to press, but Fuld hasn't been asked to return a single penny that he made from selling stock he received as compensation.
By Fortune's count, Fuld, a bond trader turned CEO, has realized almost half-a-billion dollars from cashing in stock options and restricted stock awards since Lehman (LEH, Fortune 500) went public in 1994. (I'm mentioning his stock swag but not his salary or bonus to show you how stock compensation can work out great for the Fulds of the world, but not so great for shareholders.) By our calculation, which Lehman declined to discuss, Fuld has knocked down $489.7 million (before taxes) from selling 14.4 million optioned and restricted shares. (He seems to have kept 2.7 million.) His best year was 2001, when he collected more than $100 million. Last year, when Lehman stock fell 16% as the debt markets seized up in the summer, he still realized $53 million. You can find the juicy year-by-year totals, compiled by my colleague Doris Burke, at right.
Even by Wall Street standards this is serious money. To be sure, Fuld is a Lehman lifer and has gotten a lot of credit - and money - for supposedly doing a good job over the years. As his stock sales show, though, none of us need cry for him if he now pays the price for failure.
Lehman won't fail, but its stock ain't necessarily a bargain. Lots of players, including the Federal Reserve Board and most of us ordinary people, have a stake in Lehman's not collapsing. (So does my employer Time Inc., which sublet ten floors in the Time & Life Building to Lehman near the height of Manhattan's commercial property boom.) The Fed's concern is global: that a Lehman collapse, following so closely on the Bear Stearns implosion in March, would undermine faith in the world financial system. Without faith, the system won't work. You know, of course, that shortly after the Fed orchestrated the sale of Bear Stearns to J. P. Morgan (JPM, Fortune 500) it set up a facility to make virtually unlimited amounts of money available to the likes of Lehman. (The timing was intentional.) Unless short-sellers and hedge funds can somehow overwhelm the Fed, it won't let Lehman fail.
That doesn't mean Lehman's stock price will rise or the Fed won't force a sale on terms that shareholders won't like. The Fed cares about Lehman's survival, but not about its stock price. In fact, one reason the stock has fallen so much is that under Fed pressure, Lehman last month raised $6 billion on terms that sent its share price plunging.
Size doesn't matter - competence does. Lehman is the smallest of the Big Four investment banks. But it's not in trouble because it's too small, which many people seem to think. As Fortune.com's Roddy Boyd has pointed out, Lehman got itself in trouble because it overreached, straining its balance sheet and playing unsuccessful games in the commercial property and residential real estate businesses. Some giant so-called universal banks like Citi (C, Fortune 500), UBS (UBS), and Wachovia (WB, Fortune 500), far larger than Lehman, are horribly messed up - their size didn't save them. This isn't basketball, where a good big man will almost always beat a good small man, head to head. It's finance. Will that particular lesson ever be learned, considering Wall Street's current woes? No way. Pass the options, please.
Monday, June 23, 2008
Friday, June 6, 2008
Friday June 6 DOW down 400
Unemployment rate zoomed to 5.5%. Biggest jobless jump since 1986.
However this could be due to new grads joining the pool.
OIL soars more than $10 to Record. Merrill states oils is going to $150 by July 4.
DOW crashes 400 points.
On June 2 i did state that
buy commodities or stay in cash.
However this could be due to new grads joining the pool.
OIL soars more than $10 to Record. Merrill states oils is going to $150 by July 4.
DOW crashes 400 points.
On June 2 i did state that
buy commodities or stay in cash.
Monday, June 2, 2008
June 2 2008 musings.
Bill Gross: Lies, Damn Lies and Government Inflation Data
see complete article below.
Here is what i think is going to work eventhough i am not a big fan of
commodities.
1. Commodities (DBC, DBA, POT ...
2. Cash or Good short term debt
3. Preferreds or bank loans. if economy sours then the bank loans can go south.
4. Equity ( MSFT, ORCL, GE(??))
banks/retail/consumer discretion would be duds till the commodities cool
and consumer spending picks up.
Bill Gross: Lies, Damn Lies and Government Inflation Data
Posted Jun 02, 2008 12:26pm EDT by Aaron Task in Investing, Newsmakers, Recession
Related: PTTAX, ING, ^SPX, SPY, TLT
Pimco's Bill Gross provides detailed analysis on what most Americans already know: The government's "official" data understates inflation.
Gross' treatise focuses on how CPI is compiled -- with hedonic adjustments and "owners' equivalent rents" -- in a way that's unique in the industrialized world. Such adjustments and a focus on "core" inflation -- or "inflation excluding inflation" as Barry Ritholtz calls it -- help explain why the Fed is far less concerned about inflation than central bankers in other parts of the world.
If the financial markets were to "readjust" to actual inflation, the stock market would lose 10% of its value and the bond market 5%, Gross says.
Gross, whose firm manages more than $800 billion in mostly fixed-income assets, fails to explain why stocks (and real estate, for that matter) will suffer more than bonds in this hypothetical "readjustment of investor mentality."
see complete article below.
Here is what i think is going to work eventhough i am not a big fan of
commodities.
1. Commodities (DBC, DBA, POT ...
2. Cash or Good short term debt
3. Preferreds or bank loans. if economy sours then the bank loans can go south.
4. Equity ( MSFT, ORCL, GE(??))
banks/retail/consumer discretion would be duds till the commodities cool
and consumer spending picks up.
Bill Gross: Lies, Damn Lies and Government Inflation Data
Posted Jun 02, 2008 12:26pm EDT by Aaron Task in Investing, Newsmakers, Recession
Related: PTTAX, ING, ^SPX, SPY, TLT
Pimco's Bill Gross provides detailed analysis on what most Americans already know: The government's "official" data understates inflation.
Gross' treatise focuses on how CPI is compiled -- with hedonic adjustments and "owners' equivalent rents" -- in a way that's unique in the industrialized world. Such adjustments and a focus on "core" inflation -- or "inflation excluding inflation" as Barry Ritholtz calls it -- help explain why the Fed is far less concerned about inflation than central bankers in other parts of the world.
If the financial markets were to "readjust" to actual inflation, the stock market would lose 10% of its value and the bond market 5%, Gross says.
Gross, whose firm manages more than $800 billion in mostly fixed-income assets, fails to explain why stocks (and real estate, for that matter) will suffer more than bonds in this hypothetical "readjustment of investor mentality."
Tuesday, May 27, 2008
OIL up up and away...$4/gl
Last post was on May 9th and i stated that
DOW is not going anywhere past 12500.
Before the memorial day weekend, DOW closed at 12487.
OIL $4 and grains/gold are still high.
Dick Bove states there is lot of capital but it is sitting on
the sidelines. Also he predicts the inflation calculated by
Reagan methods is 11% and not the 4% the govt claims.
He states that the capital is sitting on the sidelines with the soverign
funds and the money supply in the first quarter (M3) is explosive growing
at 16%.
9 may dow 12700
15 may dow 12992
19 may dow 13028
21 may dow 12601
23 may dow 12479.
from 19 thru 23 a fall of 4.3% 12479/13028
DOW is not going anywhere past 12500.
Before the memorial day weekend, DOW closed at 12487.
OIL $4 and grains/gold are still high.
Dick Bove states there is lot of capital but it is sitting on
the sidelines. Also he predicts the inflation calculated by
Reagan methods is 11% and not the 4% the govt claims.
He states that the capital is sitting on the sidelines with the soverign
funds and the money supply in the first quarter (M3) is explosive growing
at 16%.
9 may dow 12700
15 may dow 12992
19 may dow 13028
21 may dow 12601
23 may dow 12479.
from 19 thru 23 a fall of 4.3% 12479/13028
Friday, May 9, 2008
"Looks like a good runup and time market took a breather."
Is what i wrote last on April 25 Looks - Apri; 25 12891 DOW
May 09 - AIG screws up - Wants to raise 12 billion expected loss 0.76/sh cents
posts $3.09/sh loss. Down 8% in pre-market. OIL up $125.
I think the market is not going to go up beyond 12500 for sometime till OIL
subsides and the the credit crunch settles down.
Is what i wrote last on April 25 Looks - Apri; 25 12891 DOW
May 09 - AIG screws up - Wants to raise 12 billion expected loss 0.76/sh cents
posts $3.09/sh loss. Down 8% in pre-market. OIL up $125.
I think the market is not going to go up beyond 12500 for sometime till OIL
subsides and the the credit crunch settles down.
Friday, April 25, 2008
April 25th
From GE results (april 11) till today (April 25), S&P is up 4.2%, NASDAQ is
up 5.7%. What happened in between. GE bad, GOOG, CAT good, MSFT ok.
Looks like a good runup and time market took a breather.
Nobel Winner Stiglitz: US Facing Long Recession
Friday April 25, 12:16 pm ET
The U.S. economy is already in recession -- and may echo the 1930s, Nobel Laureate Joseph Stiglitz said Friday.
"The big question is: how will the government respond?" said Stiglitz, in an interview with CNBC. Stiglitz, a Columbia University professor and 2001 winner of the Nobel prize, detailed his bleak outlook for the American economy.
ADVERTISEMENT
"This is going to be one of the worst economic downturns since the Great Depression," said Stiglitz.
He explained that main cause of the current situation is historically unique -- and thus is befuddling those charged with creating solutions.
Other downturns were primarily caused by excesses in inventories or inflation; but this slowdown is due to the condition of "badly impaired" banks and financial entities, which are unwilling and/or unable to lend capital -- stymieing the very borrowers who usually drive the country back to vitality, Stiglitz said. And the Federal Reserve may have used up its ammunition -- and the faith investors and planners have put in it.
"[The Fed] will be between a rock and hard place. And we're not over-worrying about credit. But [simultaneously], we need to start worrying about the real sector," he said.
And if inflation wasn't the prime recession cause, it's still a menace. The professor points to the two-pronged danger of high oil prices joined by climbing food prices, harming businesses and scaring consumers.
"Oil is particularly bad," as it means that more U.S. dollars "will be going abroad," he said.
The housing downturn is an even worse economic factor than casual observers realized, Stiglitz said. He explained that during the real estate boom, Americans were able to withdraw billions of dollars from their home equity.
"[But] with housing prices coming down, it's going to be difficult to do that anymore," he said -- drying up a spending source. And within that problem, still another complication: people typically spent the money they drew off their home equity on consumption, rather than investment -- garnering no return on the spending.
"The savings rate as we go into the recession is zero. Which means [savings] will go up, " he said -- decreasing consumer spending and weakening retail further.
What about the government stimulus package?
"The Bush Administration's response is too little, too late -- and very badly designed," he declared. The amount ostensibly being infused into the economy by tax rebate checks will be a "drop in the bucket" compared to the money being held back and siphoned out by the factors he mentioned.
"If you really wanted to stimulate the economy, increase unemployment insurance," he suggested.
"The president is telling people to go out and get jobs -- and there are no jobs for them," he said.
up 5.7%. What happened in between. GE bad, GOOG, CAT good, MSFT ok.
Looks like a good runup and time market took a breather.
Nobel Winner Stiglitz: US Facing Long Recession
Friday April 25, 12:16 pm ET
The U.S. economy is already in recession -- and may echo the 1930s, Nobel Laureate Joseph Stiglitz said Friday.
"The big question is: how will the government respond?" said Stiglitz, in an interview with CNBC. Stiglitz, a Columbia University professor and 2001 winner of the Nobel prize, detailed his bleak outlook for the American economy.
ADVERTISEMENT
"This is going to be one of the worst economic downturns since the Great Depression," said Stiglitz.
He explained that main cause of the current situation is historically unique -- and thus is befuddling those charged with creating solutions.
Other downturns were primarily caused by excesses in inventories or inflation; but this slowdown is due to the condition of "badly impaired" banks and financial entities, which are unwilling and/or unable to lend capital -- stymieing the very borrowers who usually drive the country back to vitality, Stiglitz said. And the Federal Reserve may have used up its ammunition -- and the faith investors and planners have put in it.
"[The Fed] will be between a rock and hard place. And we're not over-worrying about credit. But [simultaneously], we need to start worrying about the real sector," he said.
And if inflation wasn't the prime recession cause, it's still a menace. The professor points to the two-pronged danger of high oil prices joined by climbing food prices, harming businesses and scaring consumers.
"Oil is particularly bad," as it means that more U.S. dollars "will be going abroad," he said.
The housing downturn is an even worse economic factor than casual observers realized, Stiglitz said. He explained that during the real estate boom, Americans were able to withdraw billions of dollars from their home equity.
"[But] with housing prices coming down, it's going to be difficult to do that anymore," he said -- drying up a spending source. And within that problem, still another complication: people typically spent the money they drew off their home equity on consumption, rather than investment -- garnering no return on the spending.
"The savings rate as we go into the recession is zero. Which means [savings] will go up, " he said -- decreasing consumer spending and weakening retail further.
What about the government stimulus package?
"The Bush Administration's response is too little, too late -- and very badly designed," he declared. The amount ostensibly being infused into the economy by tax rebate checks will be a "drop in the bucket" compared to the money being held back and siphoned out by the factors he mentioned.
"If you really wanted to stimulate the economy, increase unemployment insurance," he suggested.
"The president is telling people to go out and get jobs -- and there are no jobs for them," he said.
Sunday, April 13, 2008
GE saga
After the BSC saga, C got some funding from private equity,
Wamu got some and the stock market went up from the low of
1270 to 1370.
Most magazines were blaring that we had seen the bottom.
Then comes GE with a warning and the stock tanking 20%.
In a way, that is good for me since i am short GE.
Inflation, 80000 jobs lost in march (3rd month down in a row)
and what is going to cause this market to stablize of go up?
There seems to be enough cash in the sidelines, but a good chunk of
this may be smart cash.
Wamu got some and the stock market went up from the low of
1270 to 1370.
Most magazines were blaring that we had seen the bottom.
Then comes GE with a warning and the stock tanking 20%.
In a way, that is good for me since i am short GE.
Inflation, 80000 jobs lost in march (3rd month down in a row)
and what is going to cause this market to stablize of go up?
There seems to be enough cash in the sidelines, but a good chunk of
this may be smart cash.
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