Sunday, July 6, 2008
Credit Calls of Brokerages
Brokers are at the center of storm. It makes sense to analyze their liquidity level and delveraging conditin to predict its outlook. Here are a few findings. Lehman's liquidity is on par with other brokrs such as MS and Merr. Its unregualted unencumbered alone can cover most risky assets (residential mortgage, commercial mortgage, leveraged finance), ratio 1.18. The total amt of risky asset is around 60 bi, and its excess liquidity ís 45 bil. Leh has deleveraged a lot, its gross leverage (liability /equity) declining from around 30 to 23, even lower than MS's leverage. However it still has relative higher exposure to risky exposure. Its ratio of risky assets to equity has decreased from 4 to 2.3, still much higher than MS 1.3 and GS 0.8. GS has lowest exposure to risky asssets, eqivalent to 83% of its equity. Thus its debt holder should be least concerned about deliquencies. The rest, Merr and MS, are somewhere between Lehman and Goldman in terms of liquidiy and leverage. I believe Lehman is able to weather the credit storm given is liquidiy and financial conditions. Also, Fed will continue to open its lifeline to broker and the last it wants is another bankruptcy like BSC.