Lehman Counterparties, Clients Walking A Delicate Line
Trading counterparties and clients of Lehman Brothers Holdings Inc. (LEH) were treading a delicate line Wednesday, voicing support in the Wall Street investment bank, while also quietly looking to reduce some exposure to the firm in order to protect assets.
Across Wall Street, the consensus was that Lehman didn't have the sudden confidence problems that had overwhelmed Bear Stearns Cos. and pushed it into a fire sale in March. For many Lehman counterparties, however, there was an acknowledgment that they had to guard themselves as the firm's share price continues to fall, even as they wished to support Lehman and its employees.
On Wednesday, Goldman Sachs Group Inc. (GS), Merrill Lynch & Co. (MER), Morgan Stanley (MS), Deutsche Bank AG (DB) and Credit Suisse Group (CS) said they continued to trade with Lehman. Large fixed-income money managers Pacific Investment Management Co. and BlackRock Inc. (BLK) also said they were doing business as usual with Lehman.
Chief on some traders' minds was Lehman's credit rating, which is in increasing danger of a downgrade as its shares continue to slump. Lehman's current ratings are already at the threshold of what most trading partners and clients will tolerate for an investment bank, at single-A.
The large U.S. rating services are all reviewing Lehman's credit ratings for downgrades, and if they are lowered, Lehman said it could have to post as much as $2.9 billion in collateral to its counterparties. Rating cuts may also force customers to move their business elsewhere.
Bear Stearns was brought down by an inability to access short-term debt financing markets. Lehman has more protection against that outcome, as it has access to Federal Reserve lending facilities opened after the Bear collapse.
But if mutual funds, hedge funds and other clients stop turning to Lehman for money management or trading help, it will be a further blow to Lehman's ability to drum up earnings, putting more pressure on the firm.
Daniel Dektar, a portfolio manager at Smith Breeden Associates Inc. in Chapel Hill, N.C., said his firm has minimum rating standards for all its counterparties.
If Lehman's rating is cut, Mr. Dektar said, 'we have to curtail our activities with them - some clients would require us to unwind positions with Lehman, and that's probably true for a lot of money managers.'
The decisions of hedge-fund clients - which borrow money and turn to brokers like Lehman for trading and lending assistance - aren't as essential to Lehman as they were to Bear. Less than 10% of Lehman's revenue has come from prime-brokerage services in recent years, according to Glenn Schorr, a UBS analyst, compared with about 20% for Bear Stearns before its difficulties earlier this year.
Yet the Bear Stearns drama continues to hang over decisions about Lehman. On some trading desks, talking about Lehman is forbidden as hedge-fund managers and other traders fear getting subpoenas from the Securities and Exchange Commission for spreading rumors, as has happened after Bear Stearns's fire sale. 'There's a chill around talking about it,' said one trader, who asked not to be identified.
In recent months, some hedge funds and other clients have been spreading around their prime-brokerage business so as not to concentrate all their counterparty risk in one place.
Some large hedge funds, including Renaissance Technologies Corp., pulled business from Lehman Brothers several months ago, worried about the firm's future. Others in recent days have asked that their trades be matched with a different bank, said one trading-firm executive who asked that his firm's name not be used.
Serena Ng / Gregory Zuckerman / Aaron Lucchetti |
|
