The Two Faces of Lehman Brothers

“We recommend investors remain on the sidelines with Lehman until the firm demonstrates a reduction in leverage and lowers its exposures to troubled asset classes.” – Sanford Bernstein analyst Brad Hintz

Venus challenging Uranus yesterday certainly brought shocks and surprises to Wall Street when troubled investment bank Lehman Brothers (LEH) announced a management shakeup. With Mercury and Venus in dualistic Gemini, two heads needed to roll. But with Mercury retrograde, the story has yet to completely unfold.

Effective immediately, Chief Financial Officer Erin Callan “will be rejoining the investment banking division in a senior capacity” and will be replaced by Ian Lowitt, who will also join the firm’s Executive Committee. Herbert (Bart) H. McDade III will succeed Joseph Gregory as president and chief operating officer of the firm. The Financial Times and The Wall Street Journal are reporting today that Callan and Gregory told CEO Richard Fuld that they should step aside from their roles as an effort to restore Lehman’s Street cred. With Mercury conjoining Fuld’s natal Uranus Wednesday, Fuld concurred the management shakeup was necessary.

It is doubtful that replacing two executives at this stage of the game will placate Wall Street. The numbers spewing out of Lehman Brothers are always quoted in billions. A $29 billion commercial real estate debt portfolio. $12 billion in capital raisings so far this year. I say “so far” because back in February Lehman said a $1.9 billion preferred offering “took care of their full year needs.” Then Lehman raised $4 billion in late March that they said really didn’t need, but did as a gesture to allay Wall Street’s fears in light of the collapse of Bear Stearns. Then on Monday came the fiscal second quarter earnings pre-announcement $2.8 billion loss, and the $6 billion preferred and common stock offering.

I first wrote about Lehman on June 18, 2007 in response to a Barron’s article pushing the brokers. The stock charts of Bear Stearns, Lehman, and Goldman Sachs (GS) did not look well to me and with the Saturn/Neptune cycle about to end and Saturn soon to go into Virgo, I knew that the credit bubble was about to pop and lending would tighten substantially. The addition of Jupiter in Capricorn in December 2007followed by Pluto in Capricorn a month later would really start to unravel all the bad debt and financial wizardry the investment and commercial banks had engaged in. With the business planets Jupiter and Saturn in earth signs, everyone is very wary as no one knows for sure what’s on the books at these banks, let alone what their actual values are. It seems like something somewhere is getting marked down on a daily basis.

With Bear’s rapid unraveling, it seemed that Lehman’s strategy of making CFO Callan their public face was a good one. On Lehman’s FQ1 March 18 earnings call, investors appeared soothed by Callan’s level of detail. Yet questions remained. In an April 11 post on Lehman, I wrote about $300 million in writedowns taken in liquidating three funds. Despite absorbing $1.8 billion (there’s that “b” word again) onto its balance sheet, Lehman chose to quietly reveal it in an April 10 SEC filing.

Two people left their management positions yesterday, yet the media’s focus has been on Erin Callan. Callan only became CFO in December, while Joseph Gregory had been president since 2004, a multi-decade Lehman insider and friend of CEO Fuld. Lehman came very close to be swallowed by the Bear in March, and I think Callan’s efforts went a big way to help them stay afloat. Lehman lengthened the terms of its collateralized borrowings. A CFO does not have complete authority in calling the shots. Callan’s actions would have to have been approved by Gregory and Fuld.

The Journal cites Callan agreeing to talk to hedge fund manager David Einhorn who is shorting Lehman, as a distraction for the firm. Yet the paper also acknowledges that Callan first received approval from her bosses to do so. While Einhorn raises many valid concerns about Lehman, he has become part of a new breed of short seller. Lehman should have looked at what Bill Ackman of Pershing Square Capital was doing with the bond insurers: getting the government on board to help your trading position.

The biggest issues facing Lehman are its ever-changing capital needs and its weakness compared to its competitors in investment banking. Lehman claims it hasn’t used the Federal Reserve’s lending facility since April 16. That’s good news, given that Undersecretary of the Treasury Robert Steel emphasized to the Financial Times Wednesday that the Fed’s facility is “temporary.”

CEO Fuld has been with Lehman since 1967, and is the longest serving head of a major Wall Street firm. Both Fuld and Lehman investor, former AIG chairman Maurice “Hank” Greenberg, were born with the Sun in the banking sign Taurus. As a fixed sign, Taurus is stubborn and resistant to change. Transiting Saturn was putting pressure on Fuld’s progressed* Mars in Virgo at the time of Bear’s collapse in March and will make a repeat visit around June 24. Around the same time, Mars in Leo will be challenging Lehman’s stock chart progressed Sun in Taurus and natal Pluto in Scorpio. This is likely to be a long, hot summer of challenges for Lehman and its CEO.

*A mathematical calculation that moves the natal planets forward in time.
Lehman stock chart: May 2, 1994 9:30 AM New York City.
Richard S. Fuld, Jr.: April 26, 1946 time unknown New York City.
Maurice “Hank” Greenberg: May 4, 1925 time unknown New York City.

No comments: