The Credit Crisis Continues

The speed at which Bear Stearns blew up is frightening. Even more frightening is the fact that they are not alone. Rumors and bad headlines abound.

According to the Financial Times, "Lehman Brothers said on Monday it would sell at least $3bn of convertible preferred shares to US institutional investors to help bolster its balance sheet and dispel persistent rumours that it could face liquidity problems similar to those that sank Bear tearns."

Portfolio.com analyzed Lehman's earnings last quarter in this article.

Lehman reaped substantial earnings gains because investors thought it is more likely to go bankrupt. For several quarters, all the investment banks have been taking gains on their liabilities. Say you owe $100 to your friend. But you run into severe problems and your friend starts to figure you can only afford to pay back $95. If you were an investment bank, the magic of fair value accounting dictates that you could get to reduce your liability. What’s more, that $5 gain gets added to earnings. Because investors thought Lehman was more likely to default, its liabilties fell in value and Lehman garnered earnings from this. How much did Lehman win through losing? $600 million in the quarter. How much was its net income? $489 million. Lehman and all the other investment banks are following the accounting rules on this, but that $600 million is hardly the stuff of quality earnings. Indeed, Bernstein’s Hintz called the bank’s earnings quality “weak.”

Now the Financial Times is reporting that UBS is "poised to reveal further writedowns of up to $18bn and seek a capital increase of about SFr13bn ($13.1bn) only weeks after shareholders approved a similar-sized injection from outside investors."

Bennet Sedacca had a great article on Miyanville looking at some of the companies that may be in the news:

Without naming names quite yet, what would you think of a company that accomplished the following in 2007?

• Wrote down book value from $39 billion to $32 billion or from $41.35 to $29.34 per share.
  


• Increased shares outstanding from 868 million to 939 million.
  


• Increased Treasury Stock from 351 million to 418 million.
  


• Increased long-term borrowings from $147 billion to $201 billion.
  


• Increased preferred stock issuance from $3.1 to $4.4 billion.
  


• Increased Total debt to common equity to 2816.81%.
  

and here is another company...

• Wrote down book value from $35 billion to $31 billion or from $32.67 per share to $28.56 per share.
  
• Increased long term borrowings from $127 billion to $160 billion.
  
• Increased total debt to common equity to 2496.53%.
  
• Maintains an $88 billion position in Level 3 assets, or 283% percent of shareholder equity.
  

The two companies? Merrill Lynch and Morgan Stanley.

It is little wonder that the TED Spread is still at historical highs. Banks are afraid to lend their money out to other banks. The spread between Moody's Baa rated bonds and the Treasuries is also at its recent high.

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