Too chicken to peek at Lehman Brothers
Well, for once, diehard Lehman investors have a bit of rumor news to smile about -- sort of. Lehman shares surged on confirmation that a South Korean bank is in talks to buy a large stake. Some reports put the number at around $6 billion. A deal of that size would certainly squelch some of the chatter that Lehman's books are hanging on by threads of hope and that it's the next bank to implode.
Good news, right? Short-term, absolutely. Lehman reports earnings later this month, and what better way to start off a conference call than by reassuring investors there's more than enough capital to feed the hungry writedown monster? It would also become a lot easier to sell mortgage-backed collateralized debt obligations, wipe the slate clean, and start over on a new path to victory.
Woo-hoo! No complaints, right?
Eh, I can think of a few.
First, $6 billion is half of Lehman's current market cap. Shares have fallen by around 75% year to date, and 50% of that drop has come in just the past 90 days. Whatever capital the company is able to raise would dilute the skivvies off existing investors. Plus, in all likelihood, the capital would come in the form of preferred shares carrying enormous yields. Citigroup
Second, as mentioned, raising capital would give Lehman the green light to organize a yard sale of some of its mortgage-backed assets. Problem is, those assets aren't just distressed -- they're downright deplorable. Last month, Merrill Lynch
Lastly, although this is more of an industrywide observation, it still troubles me that banks have to cross the Pacific in search of capital. There are several U.S. companies that could afford a Lehman buyout or capital injection -- Goldman Sachs
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Fool contributor Morgan Housel owns shares in Berkshire Hathaway. JPMorgan Chase is a Motley Fool Income Investor recommendation. Berkshire Hathaway is a Motley Fool Inside Value selection and a Stock Advisor pick. The Fool owns shares of Berkshire and has a disclosure policy.