Rounding up a remarkable week

Perfection Was Required:

Lehman Brothers 2007 financials (FYE November)

Revenue: US$59 billion (an increase of US$12.3 billion or 26% over 2006)
Net Profit: US$4.2 billion (an increase of US$185 million or 5% over 2006)
Assets: US$691 billion (an increase of US$187 billion or 37% over 2006)
Shareholders Equity: US$22.49 billion (an increase of US$3.3 billion or 17% over 2006)

Between 2006 and 2007, assets increased by US$187 billion, yet the S/H equity underpining that balance sheet increase grew by just US$3 billion. A 62 fold delta.

In 2003 and 2004, Lehman’s balance sheet was levered 24 times its S/H equity. In 2006, the leverage grew to 26.5x. In 2007, it struck 30.7x.

Between 2004 and 2007, revenue grew by 177%, yet net profit only grew by 79% (comp and benefits costs grew by 66%). Despite the bump in leverage and the increased revenue, Lehman’s profit margins fell from 11% of revenue to 7% — the absolute opposite of what you would expect.

If Lehman had maintained their 24 to 1 leverage ratio over the past year, their assets would be US$151 billion smaller than they wound up to be. Guess how big their “troubled” asset portfolio was, right before the bitter end? An estimated US$56 billion.

Had Dick Fuld not added the incremental leverage via that last US$151 billion of assets in 2007, there’s an excellent chance that they’d be a solvent, indepedent company today.

Famous Last Words:

“Greenspan called the last two recessions wrong, so therefore if he thinks the subprime market is going to hurt the economy or housing than it most certainly will NOT.”

Don Coxe, BMO Capital Markets on BNN TV, March 15, 2007

Bring Back The Uptick Rule

The Securities & Exchange Commission’s decision to do away with the uptick rule in early July was a mistake.

There were 10 days in the space of three trading years (2004-2006) where the volume and prices were 90% up or 90% down. Since the uptick rule was buried in July, there have been nine such days in less than two months. The market is now — in aggregate — more volatile that it was before and after the 1987 crash.

September 9, 2007
http://www.markmcqueen.ca/2007/09/09/bring-back-the-uptick-rule/

We were nattering about this problem a year ago. And now the SEC is going to get tough on naked short selling, having just made it easier 14 months ago? I think Ferris is running that show.

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Is the worst over? To answer that question, you have to know where the economy is going. Have a good weekend.

MRM