Lehman Reports Losses AND Higher Compensation Expenses

The Wall Street Journal's Marketbeat has a a nice summary of the Lehman Brothers conference call, where CEO Dick Fuld and his new and improved management team presented the details of the anticipated $2.87 billion loss.  Mr. Fuld reiterated his disappointment in the results and vowed that the firm had all the necessary steps in place for a turn-around.  It was the same rhetoric we've heard from the firm in the past with some updated details outlining where the risks remain on the balance sheet.  Lehman did unload $147 billion in assets, reducing its gross assets from $786 billion to $639 billion and gross leverage from 31.7 times to 24.3 times at May 31st, prior to the impact of the capital raising.  That is reassuring news for some, although what remains in the company's investment holdings may not be so comforting to others.  Lehman specifically discussed mark downs on its positions in SunCal and Archstone, two ill-fated real estate investments which were profiled in a Wall Street Journal article a week ago.  Calulated Risk summarized the article and provided some worthwhile insight.  According to the conference call this morning, Lehman is currently valuing these investments on its balance sheet at $3.4 billion.  Whether these positions will be marked down further is highly dependent on a turn around in the real estate market.  The SunCal investment is particularly dependent on the Southern California real estate market rebounding so that land values can start to increase again.  However, according to the LA Times, median home prices in Southern California declined again in May.  Lehman's investment in the apartment REIT Archstone was orchestrated at the peak of the market and publicly traded REITs have been pummeled since.  Clearly both of these investments may need to be marked down again. 

The most interesting part of the conference call, in my opinion, was that not a single analyst questioned why Lehman's compensation expenses rose to $2.3 billion, compared to $1.8 billion in the first quarter of 2008.  Barring some sort of unforeseen miracle, the company will most likely post losses this year on top of greatly diluting shareholders, and yet it appears as if the company is still accruing bonuses and paying out cushy severance packages?  At the end of February, Lehman had roughly 28,000 employees.  Assuming that the average salary per employee is a generous $150,000, the company should not be accruing more than around $1 billion per quarter in compensation expenses.  The explanation that I'm certain will be offered to those questioning the thought of awarding bonuses despite such horrendous performance?  "Retaining talent."  Because you wouldn't want all of those talented employees to run off to the other investment banks that are actively recruiting?  Nobody is hiring on Wall Street and layoffs will more than likely continue so something tells me the talent isn't going to run away.  Investment banking is a cyclical industry with extremely highly compensated employees who get significant upside during the upswings in the cycle.  Furthermore, it's not a commission-only business, everyone gets a nice, cushy salary.  It's amazing that investors are willing to tolerate high compensation packages for such lousy performance.