Lehman, Treasury, Fed Have Lost Control Of The Game

Analyst Richard Bove has stated Lehman CEO Richard Fuld has "lost control of the game." That is something I completely agree with as it should be obvious to all. Bove went on to say "If he doesn't do something this weekend, as of next week, the game is on." That makes absolutely no sense. Nor does Bove's price target of $20 per share.

Yes, Lehman has been shopping around for buyers, but buyers have been balking. I talked about Lehman talks collapsing and how poorly Lehman's preferreds trade in Ten Financial Entities On The Brink.

Lehman's Crown Jewel For Sale

Five days ago in a will he, won't he debate Financial News reported Lehman Brothers to keep Neuberger Berman unit.

Lehman Brothers is not looking to sell Neuberger Berman, an asset management business, according to analysts who met with Herbert McDade, the bank's new president and chief operating officer.

So much for that idea.

CNBC is reporting Lehman May Have Trouble Selling Neuberger Stake.

The same way sovereign funds balked over Lehman Brothers CEO Dick Fuld's terms to sell them a chunk of the firm, some private equity firms are balking over Fuld's terms to sell them a part of Lehman's investment management business, which includes the firm's crown jewel, the Neuberger & Berman asset management unit, sources have told CNBC.

As first reported by CNBC, Fuld, Lehman's long-time chief executive, is looking to sell a 70 percent stake in the investment management division and have an option to buy it back at a later date. As a carrot to the potential buyer is a warrant to purchase a 20 percent stake in Lehman that could be cashed in when the credit crisis abates and the firm's stock price recovers.

But potential buyers—which include nearly every major private equity firm—are starting to balk at Lehman's initial offer, according to Wall Street executives familiar with the matter.

Their problem is the price. Lehman is pricing the investment management division at around $10 billion, meaning a 70 percent stake would cost $7 billion. But the real cost will be much more than that, because asset management firms are only worth something if employees remain with them following such a transaction. Potential bidders believe that unless they set up a large retention pool—something in the neighborhood of $400 million to $500 million to keep employees at their jobs—the talent will walk, these people say.

Meanwhile, many of the firm retail brokers, who are part of the firm's investment management division, have been offered jobs by the likes of Morgan Stanley, plus bonuses to jump ship. Without a retention package, many might just leave Lehman, particularly as the firm's prospects grow dimmer.

Fuld Wants His Cake And Eat It Too

Neuberger Berman is clearly on the block but no one wants to pay what Fuld is asking.

Fuld is trying to sell something that is worth more to him than to any potential buyer, at a price that is clearly too high. He also wants an option to buy it back later. In other words he wants downside protection while capping someone else's gain. He is in no position to be asking for such terms and everyone knows it.

Korea Back In The Game

Bloomberg is reporting Lehman Rises After Korea Bank Comment on Investment.

Aug. 22 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, rose the most in two weeks in New York trading after Korea Development Bank said it's "considering" an investment in the company.

Lehman climbed $1.44 to $15.16 at 11:43 a.m. in New York Stock Exchange composite trading, after reaching $15.93. Shares of the New York-based firm dropped almost 80 percent this year before today, the worst-performer on the 11-company Amex Securities Broker/Dealer Index.

"KDB is considering all kinds of options, including Lehman Brothers," a KDB spokesman said today, declining to elaborate. A Reuters report earlier today cited a spokesman saying that the government-controlled bank is "open to" possibilities, including a purchase of Lehman.

"I would be very surprised by any deal that would lead to complete control," said Stuart Eizenstat, a partner at Covington & Burling LLP in Washington and former U.S. Deputy Secretary of the Treasury. "That would elicit a lot of questions and political blowback. I'm sure that's not going to happen."

Is This Good News?

The stock is reacting as if this is good news. Most likely it is not. If the deal happens, and that is a big if, it is likely to cause massive shareholder dilution at a price far lower than $15 per share. Didn't we just go through this at $28 a share?

One key point here that none of the articles above have addressed is that it's not just Lehman that has lost control. The Treasury and the Fed have lost control as well. If there are no US buyers, and I believe it would be a good thing if there are not, neither the Treasury or the Fed is in a position to bail out Lehman.

The reality, if one thinks about it closely, is the Fed and the Treasury never had control of anything in the first place. It was all an illusion that has now been unmasked.

The Fed and Treasury may not like it one bit, but the flood of dollars those dollars foreigners are sitting on eventually have to come home. And they will come home by buying US assets. That is the price the US has to pay for the unsustainable US credit binge we have been on. So if a huge deal with Korea is announced, expect to see the Treasury begging Congress to approve it.

In June 2008, Bernanke Blamed Saving Glut For Housing Bubble. It is amazing that anyone, let alone a Fed Chairman, can possibly think that a crack-up consumption boom in the US, financed by cheap credit from foreigners can constitute a "savings glut". Bernake is clearly incompetent.

In the past few months, Singapore, Abu Dhabi, and now South Korea have or are considering "bailing out" US corporations. This is what's become of Bernanke's ridiculous "savings glut" theory.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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