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Lehman Brothers (LEH): The next bank in need of a bailout?

Posted May 29, 2008

“Most of Wall Street’s moneymaking machines have shut down. Mortgage-securitization activity has gone kaput, while IPO and M&A activities are sputtering. Even worse, Billions of dollars of future writedowns and losses are still buried inside Wall Street’s balance sheets.” — Dan Amoss

by Dan Amoss

Baltimore – (TFN): Since the Fed’s rescue of Bear Stearns on March 17, the Amex Securities Broker/Dealer Index has rallied 20%. The shares of Lehman Brothers (LEH: NYSE) have rocketed more than 30%. These dramatic rallies support the popular thesis that “the worst is over” for the financial sector. But these dramatic rallies also provide attractive short-selling opportunities for every investor who believes that the “worst is yet to come.”

Most of Wall Street’s moneymaking machines have shut down. Mortgage-securitization activity has gone kaput, while IPO and M&A activities are sputtering. Even worse, billions of dollars of future writedowns and losses are still buried inside Wall Street’s balance sheets.

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LEH appears to be among the most vulnerable of all the investment banks. The stock has rallied hard since the Bear Stearns rescue. Because its business model closely resembles that of Bear Stearns, Wall Street thought Lehman was next. And it might have been, if not for the Fed.

The Fed instituted a lending facility allowing the investment banks to temporarily swap the ugliest “alphabet soup” assets for Treasuries. These alphabet soup assets — mortgage backed securities (MBS), asset-backed securities (ABS), collateralized loan obligations (CLO), and others — had been smothering the brokers to the point that Bear Stearns was hours from declaring bankruptcy. Read on to learn why the Fed could lose in the battle to keep Lehman Brothers afloat.

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