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.


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: chart) 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: chart) 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: chart) 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.