Thursday, June 12, 2008 0 comments ++[ CLICK TO COMMENT ]++

Lehman Shuffles President and CFO

Lehman Brothers (LEH), under massive pressure due to a whole hoard of reasons (the primary being their high involvement in mortgage products), just demoted the CFO and replaced its president:

Lehman Brothers Holdings Inc. replaced Chief Financial Officer Erin Callan and President Joseph Gregory three days after the firm raised $6 billion to help survive the collapse of the mortgage market and reported the first quarterly loss since the company went public in 1994.

Callan, 42, who has been a prominent spokeswoman for the bank since she was promoted to CFO six months ago, will return to Lehman's investment banking unit and will be succeeded by co-chief accounting officer Ian Lowitt, the New York-based firm said today in a statement. Herbert McDade, the 48-year-old head of the equities business worldwide, will replace Gregory.

It's really tough for someone like Erin Callan to take over, arguably one of the toughest jobs out there, and get a handle on all those highly-complex mortgage products that Lehman was involved in. Unfortunately, the people who were experts in these products, who also happened to take the firm into these risky products, are likely gone. The monoline insurers, who probably have even similarly complex problems, have a similar issue some key experts being forecefully fired or having voluntarily left. That's probably why Warburg Pincus and other key shareholders brought back Jay Brown to MBIA, even though Jay Brown led MBIA into structured products. Even if executives like him are partly responsible, they are the most knowledgeable.

Of course, the CEO of Lehman Brothers, who has somehow managed to avoid the spotlight through all this crisis seems to have managed to keep his job. Richard Fuld seems to have strong backing and reputation (he navigated Lehman through many storms and treacherous waters over the years.) I don't think Fuld should be forced out (that would create more chaos) but he should take more of the public role and try to reduce doubt.

The problem with Lehman (and other investment banks) is that they are highly vulnerable to a run on the bank. Confidence is what seems to matter (not the truth)...

Fortunately, the monolines don't face liquidity problems and can't face a run on the bank. But that doesn't mean their stock or bond prices can't drop close to zero. Exchange-traded Ambac super-long-term bonds, for example, are trading at around 25% of par with a yield of 25%. This is for an A-rated bond too. Either the rating agencies are completely wrong with their corporate bond ratings or this is one of those rare cases where you find an A-rated bond with a yield of 25%. (NOTE: I am not recommending these bonds but just using it as an example. I do not think any monoline bonds are attractive over equity since the holding companies are shell companies with essentially zero tangible assets. So even if these companies go bankrupt and somehow magically emerge from bankruptcy, the bonds won't really be worth a lot. In contrast, long-term Sears Roebuck bonds (not issued by Sears Holdings) or GM bonds or even those perpetually-disastrous airline bonds, will likely have some value in any re-organization.)


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