Why Lehman Brothers Will Survive and WaMu Won’t

Latest: WaMu in Crisis – Fed Takes Action

8-12-08:  Lehman Deal Possible Without FED Money

 

As the markets continue to settle in the wake of the Lehman Brothers announcement that they are more or less running on capital fumes at this point, many theories are being proffered in the media that are predicting everything from a Buyout for Lehman (the theory I still support based on a confidential source) to the ridiculous notion that Lehman will be Sacrificed by the Feds in an effort to send a message to the Markets that no one can rely on there being a Federal safety net in the case of another Bear Stearns-like failure.

 

I say ridiculous because it will not be Lehman Brothers who will be asked to make the ultimate sacrifice soon – Washington Mutual will. The difference between Lehman and WaMu (besides the fact that one is an investment bank and one is a thrift, a designation that would seem to matter very little when they are basically suffering from the same disease) is what will be left of them respectively when their stocks go to junk here soon.

 

Lehman Brothers true value is not written in the days stock price, but in the long term value of it’s investment arm Neuberger Berman. Even a de-listed Lehman will have viable market value in the billions that would be snapped up by all number of interested parties – as evidenced by the hyperactive rumor mongering that has surrounded Lehman bothers fate for weeks.

 

The advantage to the interested parties in waiting for Lehman to run out of rope on its own is the prospect that the Feds will jump in at that point and ante-up the bulk of the financing upfront – like the sweetheart deal Jamie Dimon and JP Morgan got on Bear Stearns.

The JP Morgan – Bear Stearns deal was the tell tale sign that the Feds have already decided who they will support through a crisis of liquidity and who they will allow to fail – only those institutions that will maintain a level of marketable viability in the aftermath of the housing bubble will be saved.

Bear Stearns was saddled with the same toxic MBS garbage that is killing Lehman and WaMu. And Lehman – like Bear Stearns but unlike WaMu – has something that others would want regardless of the fate of their rapidly decomposing commercial mortgage portfolio – namely Neuberger Berman – a division that is still highly profitable and structured in such a way within Lehman that it’s value and operations can be rescued from the rest of the troubled company.

Any deal that ended up in the unwinding of Lehman and Neuberger would leave the mammoth problem of what to do with the mounting losses being accrued by their commercial loan portfolio, which was heavily leveraged while being wildly over-valued at the peak of the housing bubble, so much so that some analysts estimate it only reach a fraction of its peak market value in an economic recovery.

Regardless, the anticipated value of the commercial portfolio, which is said to be made up of some very strategically located properties, will ultimately prove to be enough and will not derail a deal for Lehman Brothers in the end, even if it is not the winning deal CEO Dick Fuld is working for, and even if the Feds doesn’t throw in any money in the end.

How is WaMu different, and why will they be left to fail?

Well, when WaMu’s stock goes to zero, it really means the company is worth squat. They are overwhelmed with mounting losses in their own portfolios – residential and commercial – and these losses will have them cutting back on the services and storefronts that are their only gateway to sorely needed revenues.

When the credit crisis first began to reach the consciousness of the mainstream press in August of 2007, some analysts – including myself – had almost no doubt that JP Morgan was going to swoop in on WaMu as soon as their rapidly falling stock value reached $10.

JP Morgan had been on a full-court press acquiring smaller institutions in an effort to expand their retail footprint with already established storefronts. Bank One is the poster child. I was under the impression that Q1-08 earnings would thrust WaMu’s stock below that $10 marks, and that would be when JP Morgan would strike.

Problem was every one thought something like this was on the horizon for WaMu, and the stock bounced around in the mid-teens for some time. Heck, just the prospect that Jamie Dimon was still shopping for new opportunities propped up several other troubled stocks like Indy Mac and National City too.

But when the Bear Stearns deal was announced, it was like the rug was yanked out from under them all. And since the Bear deal, I have not heard even a hint of a rumor that any deal is possible for any of the three but National City – perhaps. We already know what happened to Indy Mac Federal Bank.

So what now WaMu? They are closing branches and writing CD’s at rates they will never be able to honor at payout in a desperate effort to stay raise afloat. The CEO was canned, they have been treading water since March, and there is no ships-smoke on the horizon.

Don’t look for JP Morgan, Goldman Sachs and others to voice support for WaMu in the press like they are for Lehman.

WaMu has been carrying the overhead on too many storefronts from there meteoric assent to the national bank scene. But their rapid expansion and excessive bad bets on mortgage loans have left their retail banking operations unable to sustain the weight of WaMu’s losses for much longer.

And why wouldn’t JP Morgan or the like want to gobble up WaMu? My contact at WaMu claims it is their Home Equity portfolio that is the poison pill no one wants to swallow.

My source, who holds a position at WaMu that requires an understanding of WaMu’s portfolioed assets, states that WaMu is so over-extended on their Home Equity commitments accumulated through purchase money seconds, piggy-backs, HELOCs and HELO’s during the bubble that my source anticipates there will be no opportunity to recover.

The short term goodwill generated by offering 5% CDs will not be enough to compensate for the inevitable cuts to services and their availability to customers, the source said.

Closing unutilized HELOCs on customers who do not represent credit risks just to pretty up a balance sheet soiled by subprime carnage is no way to keep your best customers happy. It is probably something of an insult.

Toss in the anticipated end to the WaMu goodies that made them a household name in American banks, like free checking and higher than average yield savings accounts and CDs, and there is very little left for WaMu to differentiate themselves from any other mainstream bank.

Hence, no rumors of foreign banks or private equity rescues for WaMu. And don’t hold your breath for the feds to throw bad money after bad either – they have their eyes on the survivors and are looking long term – regardless of how reckless and impulsive their actions on Bear Sterns seemed – they have their chosen few, and WaMu ain’t on the list.

Ultimately, somehow I am sure it will be the taxpayers who will foot the bill for WaMu’s reckless assent. Isn’t is always?

We can expect a few more big names in there, I am sure – but Lehman will not be one of them. Nor will Merrill Lynch in the end, or any other financial that has solid non-mortgage related value, regardless of how bad their portfolios look.

So, now you know when Lehman and WaMu stock go to zero, Lehman (and the like) will survive and WaMu (and most thrifts) will go down hard S&L style.

It’s not that everyone doesn’t want WaMu to make it, it’s that in the end, the bottom line says it is just not worth it.