Posted on June 9th, 2008 in Mr Mortgage's Personal Opinions/Research
If you look at the time line of events surrounding the Bear Stearns collapse and subsequent brokers earnings, it is obvious that the lies of the brokers, not only saved them personally, but were pivotal in changing market sentiment and dynamics leading to a multi-month rally led by financial stocks.
Lehman was first scheduled to release earnings following the Bear Stearns implosion in March. If they would have shown a loss, like they did today, it could have meant the end of Lehman.
The market mood was so negative that no words during the conference call could have overcome the loss, and investors would have assumed they were “the next Bear” and driven the stock price into the ground.
Because of this, they chose to lie by padding their earnings and showing a profit, as proven by David Einhorn and Brad Hintz. Goldman and Morgan, who reported shortly after Lehman, may have taken their cue from Lehman and done the same. We will find out shortly.
Due to these three companies posting actual “profits” as opposed to losses in a climate of fear, it made it appear that “the Bear Stearns event” was an isolated incident and company-specific. Because the Fed opened new laundering facilities for the brokers at that time (the PDCF and TSLF), investors assumed that “if these brokers can post a profit during Q1, which was the worst in history for the financial markets, then with the new Fed laundering facility they are home free.” At this point, everyone called a bottom in the market and rallied stocks, in particular financials, for two months.
If Lehman had kicked off Q1 broker’s earnings season with a loss, even with the new Fed laundering facilities, the market and financials would have likely performed much worse then they did.
Lehman shareholders must be pissed. The bank lied about earnings saying “all is good,” while behind the scenes are hedging exposure (so they say), selling off assets (so they say) and making plans to dilute their shareholders even more (so we know). Despite hedging, by the way, Lehman may have more than $30B of exposure to real estate remaining (they had about $85B at the end of Q1 and appear to only have hedged about $47B).
There are credible arguments that Lehman has abused the Fed laundering facilities in order to keep the cash flow going. Due to this and after being exposed as frauds by many, including very publicly by David Einhorn, they could not use their old accounting tricks this time around because everyone would have noticed.
David Einhorn going public with his thoughts on Lehman forced them to tell the truth, or at least their version of the truth at this moment in time. If not for him, today’s earnings report may have looked much different.
How all of this will play out is anybody’s guess. It may even lead to a “Bear Stearns-style implosion.” But one thing is for sure – longs and shorts both have something to be angry and perhaps sue over. Longs, for being lied to in Q1 and buying the stock as it ramped higher, only to have Lehman suddenly get religious, tell the truth and dilute them to death. Shorts, for getting the story right in Q1 and getting blown out of their trade by the lies that have now become public. –Best, Mr. Mortgage
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