Nervous Investors Sell Lehman, Goldman

123jump.com Staff
17 Mar, 2008
New York City

Investors sold stocks of financial brokerage firms after the fire sale of Bear Stearns to JP Morgan. The four largest brokers Goldman Sachs, Merrill Lynch, Morgan Stanley, and Lehman dropped. Investors worried that rising margin call requirements and rapidly declining mortgage securities values may erase equity capital of these companies. European markets, Japan, India, and Brazil fell sharply.

[R]5:00PM New York – Nervous investors sell Lehman and Goldman after a fire sell of Bear Stearns. Lehman and Goldman are just as highly leveraged as Bear Stearns was.[/R]


Global Markets Update

U.S. financial stocks dropped as investors pulled money from the sector. The collapse in Bear Stearns stock shocked investors and left them worried of the fate of Merrill Lynch, Lehman Brothers, Goldman Sachs, and Morgan Stanley. Lehman plunged 50% after its chief executive said the added liquidity from the Fed will help the financial system. The vague statement concerned investors that Lehman may be facing liquidity crunch, which the company denied.

Bear Stearns facing bankruptcy and under heavy supervision from the Fed, agreed to a purchase price of $2 per share or $235 million from JP Morgan. The fifth largest broker was essentially liquidated, wiping out the company that only a year ago had a market value of $40 billion. The fire sale price of Bear Stearns sent shock waves around the world. Global markets plunged as investors worried that the U.S. regulators and politicians appear to lack effective tools or the understanding to contain a widening meltdown in the financial markets.

The Federal Reserve Bank on Sunday lowered the discount rate by 0.25% to 3.25%. The emergency move, ahead of the meeting tomorrow has not kept investors happy. The Fed’s hasty move to lower the rate and may fuel inflationary pressure in the months ahead.

Lehman, according to its latest financial statement released at the end of November had $21 billion in cash and long term assets of $614 billion. The company held $123 billion in liabilities. Analysts estimate that Lehman has access to capital of $91 billion. The key measure of the bank’s leverage is the ratio of financial asset to cash. The ratio at Lehman is 30, a huge leverage and could have deteriorated more in the last three months of financial distress.

A small decline in asset valuation, a loss of client confidence, and a rise in margin calls on the borrowed funds could wipe out the equity of the bank in a matter of days. Worried investors could essentially stage a run on the investment banker.

Merrill Lynch ((MER)) ratio of financial assets to cash is 18. The leverage Merrill also worries investors as the broker has $41.4 billion of cash and $717 billion of long term assets at the end of 2007. Since then financial markets have deteriorated and values of these assets are likely to be lowered again.

Morgan Stanley ((MS)) at the end of November had cash position of $87 billion and long term financial assets of $506 billion. The ratio of assets to cash is 6, one of the lowest ratios in the industry.

Goldman Sachs ((GS)) at the end of November had cash position of $11.8 billion and long term net assets of $818 billion. The ratio of financial assets to cash at the investment banker at that time would be above 70.

Continued deterioration in the mortgage securities values and lack of liquidity in various segments of structured financing will only increase liquidity stress at these large brokerage firms.

Not all long term assets are subprime assets but it is the lack disclosure and public awareness of the nature of the liquidity that is worrying the investors.


European markets fell between 4% and 5% on the rising worries related to capital adequacies at banks and their exposure to the U.S. subprime and leveraged loans. Switzerland led the region with a loss of 5% after UBS announced a plan to eliminate 8,000 jobs.

Turkish lira fell 3% against euro to 1.986 lira and benchmark stock market index ISE-100 plunged 7.5% after the Turkish authorities filed a case to close the ruling party and prevent the prime minister and president from holding office in a government.

UK stocks fell after the Bank of England offered 5 billion pounds in emergency short term funds and received 24 billion pounds bids for the funds. The huge need of cash unnerved the markets and banking stocks fell.

Alitalia plunged after Air France-KLM offered only 20% of the expected price. The struggling unprofitable carrier has been a caught up in the recent political turmoil in Italy.

Stocks in Hong Kong fell sharply after the rescue of Bear Stearns at a fire sale price. Hang Seng index dropped 5.2% or 1,152 to 21,084. The news of the fifth largest bank liquidation in the U.S. over the weekend kept investors guessing for the next victims and impact on the exports from the region. Separately Hong Kong reported 2007 real GDP rose 11.4% and fourth quarter growth of 11.7%. Banks, properties, and telecom stocks fell sharply. Japan, India, and China indexes declined.

Stocks in Japan and in Asia plunged after the fire sale of Bear Stearns, the fifth largest investment bank in the U.S. to JP Morgan. The news sent shock waves in the financial markets in Asia with Mumbai, Shanghai, Hong Kong, and Tokyo declining sharply. In Tokyo trading Nikkei 225 declined 3.71% or 454.09 to 11,787.51, and the broader Topix Index fell 3.7% or 43.58 at 1,149.65.

European Markets

In London FTSE 100 Index closed lower 217.30 or 3.86% to 5,414.40, in Paris CAC 40 index decreased 161.11 or 3.51% to close at 4,431.04 and in Frankfurt DAX index lower 269.60 or 4.18% to close at 6,182.30. In Zurich trading SMI decreased 357.77 or 5.02% to close at 6,774.26.

North American Markets indexes

Dow Jones Industrial Average gained 21.16 or 0.18% to a close of 11,972.25, S&P 500 closed down 11.54 or 0.90% to 1,276.60, and Nasdaq Composite Index declined 35.48 or 1.60% to a close of 2,177.01. In Toronto TSX Composite closed down 300.69 or 2.27% to 12,952.150.

Of the 30 stocks in Dow Jones Industrial Average, 16 closed higher, 14 closed lower, and none were unchanged.

General Motors led the decliners in the index with a loss of 7.2% followed by declines in Citigroup of 5.8%, in Alcoa of 3.6%, and in AIG of 3.35%. JP Morgan rose 10.3% followed gains in Verizon of 2.4%, in Johnson & Johnson of 2.2%, and in AT&T of 2.2%.

Of the stocks in S&P 500 index, 133 stocks increased, 361 declined, and 6 were unchanged. Of the stocks in the index, 10 stocks fell more than 3% and 48 gained more than 3%.

Bear Stearns led the decliners in the index with a collapse of 84% followed by losses in National City of 43%, in CIT Group of 28%, in Lehman Brothers of 19%, in Ambac Financial of 13%, and in Washington Mutual of 13%. JP Morgan Chase led the gainers in the index with a rise of 10.3% followed by increases in H&R Block of 5.10%, in CSX Corp of 4.8%, in Ashland Inc of 4.4%, and in Hudson City of 4.1%.


South American Markets Indexes

In Latin Markets Brazil led the decliners in the region with a fall of 3.19% followed by decreases in Peru of 2.9%, in Argentina of 2.84%, and in Mexico of 2.2%. Chile fell 0.27% and Colombia lost 1.22% but Venezuela was unchanged.


Asian Markets

In Tokyo Nikkei 225 Index closed lower 454.09 or 3.71% to 11,787.51, in Hong Kong Hang Seng index decreased 1152.50 or 5.18% closed to 21,084.61. Australia ASX 200 index increased 119.90 or 2.30% to close 5,087.00. In Malaysia KL Composite index decreased 17.31 or 1.45% closed to 1,177.53.

In South Korea Kospi Index decreased 25.82 or 1.61% to close at 1,574.44, in Thailand SET index closed lower 11.30 or 1.38% to 806.74 and Indonesia JSE Index edged decreased 71.10 or 2.98% to 2,312.32. Sensex index in India decreased 951.03 or 6.03% to 14,809.49.

Bond Yields increased on 10-year U.S. bonds to 3.50% and on 30-year bonds increased to 4.375%.

Commodities, Metals, and Currencies

Crude oil decreased $4.53 to close at $105.68 a barrel for a front month contract, natural gas decreased 77 cent to $9.10 per mBtu, and gasoline futures decreased 18.52 cents to close at 250.42 cents per gallon.

Gold increased $3.10 in New York trading to close at $1,002.60 per ounce, silver closed down 35.5 cents to $20.42 per ounce, and copper for front month delivery decreased 14.30 cents to 368.50 per pound.

Wheat futures decreased 60.00 cents in Chicago trading and closed at $11.31 per bushel. Sugar decreased 1.45 cent to 12.09 cents per pound. Soybean future closed down 50 cents to $13.02 per bushel.

Dollar edged lower and traded at a record low against euro to $1.5721 and edged lower against yen to 97.55.