comments: Lehman Will Survive

Rumors are circulating that Lehman will collapse like Bear. I say it won't happen. Negatives Sides Admittedly, the concerns centes on the similarity between Bearn Stearn and Lehman. Similar to Bearn Stearns, Lehman has similar share of asset exposure to mortgages, around ~29%(BSC 33%), similar share of liabilities exposured to repo, ~27%, similar of liabiliteis in long term debt, ~20%. Pepole believe that Lehman will be next after the Bearns Stearns go down. More liquidity available Until end of Feb, Lehman has 34 bil of liquidity pool and 64 bil of unregulated eligible asset for collateral, approximately 15% of $600 bil of liabilties. The number has not changed since Q4 2007. It implied the underlying assets are high quality. Before collapse, Bear Stearns has only 17 bil cash plus 5 bill unregulated eligible assts, 5% of $300 liabilities. More Diversified Business Model Lehman is far more diversified than Bearn Steans. 40% revenue comes from Equity(around 2 bil), 40% revenue comes from FI. Furthermore, nearly 50% revenue comes overseas. Bearn Steran is purely domestic and focused exclusively on FI. Hedging is working In Q1 2008, total gross writedown is around 5.4 bil, net writedown is 2 bil. It implies that nearly 60% of toxic exposure is hedged. I am forecasting anothher 2 bil - 3 bil net writedown in Q2 2008 if market condition deteriorates. Existing Exposure to Toxic Assets In Q1. US mortgage exposure is $22 bil, CMBS $36.1 bil ($17 bil US) Why does it still need Raise Capital Lehman is planning to raise $3.7 bil convertible preffereed stock. Simply put, it needs to shore up balance sheet. The writedown are directly cut into company equity capital, resulting in lower capital ratios (captial /asset). To avoid this and negative implication, Lehman raise further capital. Lehman also raise capital to pad itis cushion for further deterioration of credit market. Liquidity Alternatives First, Lehman can borrow against 64 bil assets. It can have up to at least 50 billion. Second, Lehman can tap the Term Security Lending Facility to swap part of toxic assets (US mortgage or CMBS) with Fed for Treasuries. I believe it can swap upto $5 bil All of these liquditity should be ample enough to keep Lehman float until after Q2 2008 when credit market bottom out.