Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [94]
Oppenheimer’s bank analyst Meredith Whitney wrote a report on October 31, 2007, saying that Citigroup’s dividend exceeded its profits, saying, “it was the easiest call I ever made.”42 Since that Halloween day in 2007, Wall Street has been paying closer attention to Meredith Whitney’s reports. It seemed to take more than a month before other Wall Street analysts woke up to the problem. Bear Stearns’ bank analyst David Hilder thought her concerns were overstated. He was wrong, of course. Where did Bear Stearns find these guys?
Citigroup’s losses continued to mount.As of October 2008, Citigroup’s subprime-related write-downs are $60.8 billion.43 Vikram Pandit had been CEO of Citigroup just over a month when the numbers I challenged were reported. Pandit cofounded Old Lane Partners in 2006 and sold it to Citigroup in July 2007 for $800 million. His personal take for his share was $165 million, but he plowed $100.3 million of it back into the fund. By June of 2008, Citigroup shut it down.The Wall Street Journal reported the fund “has been dogged by mediocre returns and the loss of its top managers.” Old Lane had raised $4 billion from investors and borrowed $5 billion more. Citigroup agreed to take $9 billion of assets onto its balance sheet after writing down $202 million. Whatever you may think of Pandit’s qualifications to lead Citigroup, it seems he knows how to time a sale.44
Lehman was not so lucky with its sales; it could not raise cash when it need it. Many questioned Lehman’s accounting. David Einhorn of Greenlight Capital had publicly questioned Lehman’s first quarter accounting numbers. Lehman reported a $489 million “profit” and only took a $200 million gross write-down on $6.5 billion on its holdings of asset backed securities. Einhorn complained that (among other things) Lehman did not disclose its significant CDO exposure until more than 3 weeks later when Lehman filed its 10Q (a required financial report).45 In October 2008, Lehman and Tishman Speyer engineered a $22.2 billion leveraged buyout of Archstone, an apartment developer. Fortune said Dick Fuld declined to talk to it for months and it seemed to Fortune that the Archstone deal had losses almost from the start.46
Richard Fuld tried to sell a stake in his separate asset management unit to stay afloat. He was unsuccessful. Lehman Brothers worked during the weekend of September 13 and 14 with a group of potential buyers. Bankers wanted the Fed to participate, but the Fed refused. Bankers fretted about how they would unwind (sell out) their derivatives trades with Lehman. On Monday, September 15, 2008, Lehman Brothers Holdings Inc., a 158 year-old firm, filed for bankruptcy. It is still alive in the minds of its creditors, since they will not know what they have left until Lehman’s assets are finally liquidated.4748 Hedge funds that used Lehman Brothers as their prime broker found “their” assets temporarily frozen. Like many other prime brokers, Lehman had provided financing for hedge funds to purchase assets, and now it was not clear whether Lehman or a hedge fund owned a particular asset. Like creditors, Lehman’s hedge fund customers will have to wait until the mess is sorted out. Warren had been correct in warning that the leverage unwind would be painful, and it seemed hedge funds and investment banks failed to imagine all the ways it could cause pain.
John Thain as CEO of Merrill Lynch recognized that a Lehman bankruptcy could have negative implications for Merrill. He and Ken Lewis, Bank of America’s CEO, hammered out an agreement, and on September 14, a Sunday night, Bank of America Corp. agreed to purchase Merrill Lynch & Co. in an all-stock deal for $29 per share (at the time of the announcement worth about $50 billion), a premium to its closing price the previous Friday. The combined firm will be a behemoth if