Lehman no more....

CFO and COO fired today, firm goes on selling block

(I really did not think I would be writing this post....I actually had faith in Callan but I guess I was wrong)

Another iBank bit the dust....this time it was the once-mighty Lehman Brothers. But before that news broke the CFO, Erin Callan, [must-read bio of her in the WSJ] that everyone spoke so highly of got the axe first thing this morning. For the record, I was a fan of her no-frills style. But just one quarter ago she proclaimed LEH's capital structure fit for the environment and their balance sheet flush with cash. Unfortunately she was wrong on both fronts. Evidently, she hardly knew what was going on with the firm. Is that bad? Maybe but it's not really her fault.

With the advent of complex derivatives and hybrid structures on the CDO desks, not even a room full of Harvard PhDs could unpeel the potential losses that the firm had (and probably has) on it's books.

I don't blame her, I don't blame derivatives, I don't blame corruption nor do I blame overzealous investment bankers. I simply blame one simple metric: EPS (more precisely increasing the EPS on a quarter-by-quarter basis to push share prices higher). The past few years we have seen iBanks making money hand over fist and everyone wanted a piece of the action. Both CEOs and shareholders, alike, wanted equity growth through higher revenues and stronger EPS figures. Everything was about increasing the firm's bottom line. Increase prop trading, a deal here, another deal there and then BAM - money for everyone. The trading desk was the "big bet" for higher revenue and EPS growth. In man cases, a complete disregard for VAR. Well they got what they wanted, however, at the cost of unintended consequences.

O'Neal at Merrill did it this same thing and so did Cayne at Bear. The push for higher revenues and EPS really was a function of their cowboy-like thirst for risk. Nothing more, nothing less. Can you blame them? I can't. The CEOs/CFOs are just figureheads...these people have no clue what was happening on the trading desk nor were they aware of the complex derivative structures being constructed by traders looks for their own piece of the action. In fact, one could possibly argue that the traders on the desk ran the show while execs were just clueless.

Within the next few days, Lehman as we have known it for all of these years will be Lehman no more. And for us followers of Wall Street and the ever so interesting subplots of the these titan firms we get closure on a chapter. A victim of relentless risk-taking and an unquenchable desire for big deals, one of Wall Street's most historic, venerable firms will exit the stage.

Remember this from an earlier post in March...

Lehman to offer $3 billion convertible preferred shares

Lehman decided to raise some cash by issuing $3 billion in convertible preferred shares. In an interview today:

"We still maintain that we don't need capital, but we've realized that perception is the dominant issue in today's markets," the chief financial officer, Erin Callan, said in an interview. "This is an endorsement of our balance sheet by investors."

At a minimum, I would say that this is a bit slightly alarming and should be viewed with caution by current LEH equity holders. This, by the way, comes on the heels of Lehman saying it has plenty of liquidity - more than $90 billion of assets it holds in cash or fairly liquid assets.

The stock sold off more than 2% after hours. I would avoid the name at the moment and would expect to see analysts lowering EPS estimates in the near term.

It was at this very moment that we should have known. The firm was giving us a clear signal that they were unsure of what lied ahead. Nothing deceptive in these actions but just completely unknowing of the impact that the CDO market would have on their balance sheet. Another venerable firm up in smoke.

UPDATE: This article is based on my assumption that LEH will eventually be bought out. I am not saying they will go bankrupt. Despite what some investors may be saying, I just don't think that LEH is done with the losses.