Lehman’s Lies Sparked Recent 2-Month Market Rally

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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MORE MR. MORTGAGE RELATED STORIES

ALT-A Exposed – Much Worse Yet to Come

Lehman’s Dirty ALT-A Exposure

10 Responses to “Lehman’s Lies Sparked Recent 2-Month Market Rally”

  1. Global recession, that is it.

  2. Actually if I was an investor I would be happy about that bit of lying. I would much rather the company not go under, or lose 90% of it’s value like Bear Sterns.

  3. I was impressed that Einhorn calmly stated he would have to hear the CC to decide whether to cover, keep the position on, or increase the position. Inside of this comment was a subtle implication: I think Einhorn realizes that the investing public and much of Wall Street are structurally clueless. So he is saying he doesn’t need to position himself “before” news on the CC because, I suspect, he believes the street is equally incapable of using news, and figuring this stuff out on its own. If this is what Einhorn believes, I think he is right.

    An example in my own trading: I went long Puts on various Hotel names a few weeks ago, like MAR and HOT. These names are already down alot. Amazingly, the public just couldn’t figure out they were at severe risk of going even lower. Voila. MAR warned a week and half later. And so on.

    The main point here is that our current generation on the street learned all about finance in B-School, but learned nothing about commodities. They still think oil is cyclical because “oil has always been cyclical.” that is certainly what they were taught at B-school.

    Finally, I love the fact the LEH is currently headed by someone with a classical mainstream background, and pedigree that most Americans would find impressive. Oh, how I love that.

  4. Your timeline and speculation about Lehman definitely make sense. They had motivation to lie, and perhaps even tacit approval from the Fed. “You guys cannot report losses right now. Do what it takes.” And it was very effective, as you point out. I’m not one to use “a massive conspiracy” as an explanation for most events, but in this case, it really does all fit together nicely.

    Ratings agencies keeping AAA ratings on the monolines to the point of ridiculousness, banks lying about the values of their portfolios, the Fed lending money to anyone, anytime – in that sort of climate, lying about your earnings for a quarter is just going with the flow.

    I think there needs to be an investigation of the ratings agencies to see what sort of pressure was brought to bear. I mean, those companies have absolutely ZERO credibility now. What kind of pressure does it take to completely destroy your company’s credibility? My mom doesn’t believe in the ratings any longer.

    The tell-all books written in a few years will be very interesting.

  5. The house of cards of at Lehman are starting to feel the strain of exposure and nowhere/no way of hiding the losses.

    Bear Stearns was brought down by bad mortgage debt mainly….Lehmans makes Bear look like a small player in the RMBS game. When the ALT-A / Neg AMM / Prime borrowers start to walk out on under water homes whooooooooo Lehmans is done. SHORT LEHMAN…HOW CAN IT GO UP NOW…WELL I GUESS THEY COULD TRY TO LIE THERE WAY FORWARD A LITTLE LONGER BUT THE HOUSE OF CARDS WILL BE DOWN SOON

  6. Everybody knows today that any Financial Institution is on pin and needles and the Government in order to avoid panic will do what it takes to avoid turmoil in the markets but in the long haul dishonesty, liquidity and profitability will do them all in like terminal cancer

  7. Does anyone in Washington have credibility ? Stinking crypto-national-socialist american ruling classes. They really get along superbly with their chineese partners and their great democratic friends from Saudi-Arabia.
    Bunch of scumbags. US Markets are like the US government, and “Con”-gress. Oh Ben Laden where are you ?

    Somebody on Wall Street needs you.
    Somebody seriously needs a good diversion.

    911 burried beautifully the scandalous bankruptcy of ENRON 11 days later. That’s why I expect hearing a lot from the “big bad and mean dudes” in Iran. You would be surprised. The bad guys are in New-York. These people are a menace to civilized world, to markets and to democracy. The real terrorists don’t work in a cave. They work at Lehman Brothers and company.

  8. […] Full Analysis Here […]

  9. Did Lehman stop lying today ? I think not. I think not.

    It’s only 2,8 billion with all the junk on the balance sheet ? How about 6 billion ? How about 10 billion ?
    Can anybody be really sure ? Nope.

    We saw the same old tricks at UBS. You administer the bad news bit by bit. That way everybody is convinced how Lehman and UBS are great franchises and investors buy again new shares. 25% dilution and eventually much much more.

    “Franchise” is a word that at the origin, came from the french and ancien frank language.

    It meant to be honest, to frank (franc) to be free and true ! 🙂 Ain’t that funny. Lehman is a great franchise like Citigroup, like UBS. So what ! Bear Stearns was a great franchise to. 🙂 Frankly my dear I coudn’t care a damn. 🙂

  10. Lies are the only thing keeping the financials from bankruptcy.

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