The Wall Street Journal reports that Lehman is offering to open its books to at least one US pension fund in the hopes of garnering an equity investment. Perhaps the Koreans turned up their noses at the once in a lifetime opportunity to invest in the US investment bank beset by troubling rumors every single day? The Financial Times reports that Temasek Singapore rebuffed Bear Stearns before it was ultimately sold to JP Morgan, offering support to the argument that sovereign wealth funds may be growing weary of getting smoked on equity stakes in US banks so soon after they have made seemingly "discounted" investments.
Opening its books to a US pension fund may be interpreted as either a conciliatory or desperate move depending on which side of the Lehman bull/bear fence you sit on. Those old enough to remember the Long Term Capital kerfuffel will recall that Long Term Capital opened its books to Goldman Sachs, who, after seeing the sheer size of its positions, allegedly proceeded to pound Long Term's longs and bid up its shorts in an effort to profit on the information without offering any help (Goldman adamantly denied doing this but we will probably never know the truth.) Not that anyone would expect a staid pension fund to do anything similar. But when they take a look at Lehman's positions, will they run screaming in the other direction?
Needless to say, nearly everyone has something to say about Lehman's delicate situation. Deutsche Bank analyst Mike Mayo believes the shares reflect the "worst case scenarios" echoing Merrill's Guy Moszkowski, who claims Lehman is a buy. In an interview with Maria Bartiromo yesterday, Lehman's former CFO Brad Hintz offered a more measured view on Lehman's future. He claimed that Lehman would not suffer Bear's fate because of the backstop from the Fed. While this argument is tossed around all the time as a sure sign that Lehman can't suffer a similar fate, I'm not so sure I agree. Didn't Bear Stearns receive a loan from the Fed which kept it from filing from bankruptcy? Check. Didn't the news send Bear's stock reeling anyway, forcing it to agree to a merger with JP Morgan over the weekend? Check. While the Fed's backstop restores confidence that the entire financial system will not crumble from one bank's troubles, it may not mean Lehman's equity is cheap.
Mr. Hintz said one thing in his interview with Maria Bartiromo that struck me as fairly disturbing. In a meeting he had with the head of risk management at one of the top four brokerage firms, the risk manager said the following about its MBS portfolio:
"We know what the value of the bottom tranche is, we know what the value of the top tranche is. But we have no idea what the value of the middle tranches are."
Hintz goes on to say that managers are making the best assumptions on pricing these securities but the exercise has the accuracy of horseshoes. I can't remember the last time I played a game of horseshoes, maybe never, but I wouldn't want to gamble my money on an investment whose accuracy level equaled my ability to hit the post (or pin, or whatever it is.)
Greenlight Capital's David Einhorn is a guest commentator on CNBC today. Whether you agree with his views or not, it should make for good television. Don't forget to keep your eye on the mesmerizing ticker when he's talking.
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