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Lehman Brothers - The Next Bank to Fold?


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Since the collapse of Bear Stearns just a couple weeks ago, Lehman Brothers has been anointed as the next US Investment Bank likely to collapse.

Over the past few weeks rumors have circulated alleging that Lehman was facing the same liquidity issues that forced Bear to fall to under 3 dollars a share, just a few weeks ago. This has caused Lehman's stock (LEH) to act in a similar manner, with numerous relative movements over the past few weeks of greater than 10% a day.

The uneasiness the market perceives in Lehman causing the volatility in the stock's trading price is simply a case of market perception in a time of uncertainty. However in the financial industry, a bank is only as strong as it is perceived; and without the confidence of the market and its investors, Lehman will go the way of Bear.

On Tuesday to combat market any liquidity questions that remain in the market, Lehman had a convertible preferred stock offering, raising more than $4 billion in liquid capital. The issuance of the preferred stock, although slowing fears of illiquidity, does in fact confirm that Lehman has been in state of uncertainty all along. Reacting to the news, the stock price was up 15% on the day, however still down almost 35% on the year.

Still facing turbulent quarters ahead, the future for Lehman is uncertain at best. Tuesday's stock offering increased shares outstanding by 15%. Although increasing cash reserves, it has also created a theoretical liability of an additional $300 million annually in dividend payments. But how will Lehman make these payments? In the period ending November 30th, 2007 the company had a positive cash flow of only $238 million dollars, down from $1.8 billion in the prior quarter.

Up on Tuesday and in the eyes of the market, Lehman Brothers still far from secure. As long as the economy stays its course, Lehman's business will continue in the same direction. It will likely be forced to cut its dividend payment down the road causing further liquidity fears from the market, and create havoc on its stock price. At that point however will JP Morgan be able to rescue another of its fallen brethren, will the Federal Reserve Bank be there again to aid in the buyout, who and how far behind will the next bank be?



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