The second quarter was tumultuous for Lehman Brothers and Wachovia Corp., two of the nation’s leading financial institutions.
Continuing a recent pattern of financial services firms firing their CEOs, the Wachovia board asked longtime CEO G. Kennedy Thompson to step down. At the time of publication, Lehman Brothers CEO Richard S. Fuld, Jr., had avoided the same fate. But President and Chief Operating Officer Joseph Gregory and CFO Erin Callan were suddenly reassigned after disappointing second-quarter results and writedowns totaling $ 11 billion.
Ian Lowitt succeeded Callan as CFO, while Herbert McDade III took over from Gregory. Callan was reassigned to a senior executive position within Lehman’s investment banking division. Gregory’s new role was unclear.
The reallocations came on the heels of news that Lehman expected to see a loss of $ 2.8 billion in the second quarter and that it planned to raise $ 6 billion through common and mandatory convertible preferred stock issues.
Just days before she was reassigned, Callan said during Lehman’s earnings call that the capital the firm hopes to raise is not being held against particular asset exposures on the company’s balance sheet. Efforts to raise capital are “so that we can get back to running our business on a day-to-day basis and stop the distractions and discussions that we have related to our balance sheet,” Callan said during the call.
Meanwhile, the Wachovia board asked Thompson to step down after the bank suffered a series of disappointing results. An analyst at Robert W. Baird & Co. said he expects more bad news from Wachovia. “While we were not entirely surprised by the announcement, in our opinion Thompson’s departure was sudden,” wrote David A. George, an equity analyst at Baird. “We wouldn’t be surprised to see more bad news (credit, capital markets, dividends) from [Wachovia] over the next several weeks. “George maintains a neutral stance on Wachovia, saying that although the company’s stock price underperformed in early June, he believed the risk / reward ratio was not attractive enough to justify the purchase of shares.
Unlike Thompson of Wachovia, Lehman President Fuld did not appear to have been pressured to resign or retire as of press time. In fact, Fuld and Lehman still enjoyed the trust of at least two high-profile banking analysts. “We are buyers of the shares on the assumption that CEO Dick Fuld will stabilize the Lehman ship and, with greater stability, the shares will appreciate,” wrote Mike Mayo, an analyst at Deutsche Bank in early June.
Merrill Lynch analyst Guy Moszkowski said the early June price correction in Lehman shares had been overstated and that concerns about the bank’s share price suffering further from a financing challenge of the kind Bear Stearns were unfounded. Lehman’s shares “have significantly exceeded fair value in recent days, due to speculation and concerns that are not justified, in our opinion, given access to the [Federal Reserve’s] ease of principal distributor and ample liquidity, “Moszkowski wrote.
Those persistent rumors about liquidity made Lehman need some praise from analysts. Rumors of a possible sale were rampant, along with accounts that the company had reached out to various South Korean investors, including the Korea Development Bank and Woori Financial Group.
Those concerns are not entirely unfounded. Credit default swaps had expanded from 140 basis points in early May to about 260 basis points a month later. Additionally, Standard & Poor’s had downgraded Lehman’s long-term rating to A from A +, according to a review of the global securities industry.
Before Lehman’s early announcement, Deutsche Bank Mayo predicted that Lehman would take action by raising around $ 4 billion in capital, citing the desire on the part of the company’s management to maintain control of its destiny and focus its efforts more on offense, rather than defensive tactics. Still, Deutsche Bank lowered its target share price estimate to $ 49 from $ 52, saying it expects to cover losses at Lehman as well as a dilution should the company issue additional shares.
Also, before Lehman’s earnings were announced, Merrill’s Moszkowski reversed his second-quarter forecast, from a profit of 6 cents a share to a loss of 74 cents a share. He blamed possible market-price asset values that could fall by around $ 1 billion, ineffective hedging and general market weakness in May.
In early June, rumors circulated that both Lehman and Wachovia would be acquired by other firms. In the Wachovia case, such a deal is unlikely, George de Baird said. For one thing, he said, the list of potential buyers is limited to JPMorgan Chase & Co., which is already busy assimilating Bear Stearns, and San Francisco-based Wells Fargo & Co. of a Wachovia purchase, given all your current challenges.