On The Stupidity Of Sell-Side Analysts

We have often noted our confusion at the seemingly impossible: a sellside analyst, coming to work each and every day, even though this process tends to be preceded by the monumentally difficult process of tying one's shoes. But don't take our word for it - the Valukas gift that keeps on giving, has summarized some of the more relevant analyst quotes disseminated by the sell-side to their clients, in the days and months before the firm filed for bankruptcy. (Stunningly, Dick Bove's Buy call on Lehman days before the firm blew up did not make the list). Instead of actually digging into the numbers, (hint - if Einhorn did it, it can be done] every single analyst was perfectly happy to accept the "reality" that was presented to them (with remarkably few exceptions) and spin it in to some sort of positive case, just so the firm's sales and trading operation could milk a few extra dollars in commissions from LEH shares. Let's dig in:

In addition to documents demonstrating that Lehman, internally, continued to focus in 2008 on reducing its firm?wide leverage, analysts and the market similarly continued their focus on the firm’s leverage. A few illustrative examples of analyst comments follow:

• “The modest silver lining is that LEH was able to reduce gross assets by $130 billion, including large reductions in mortgage related (15%?20%) and leveraged loan (35%) exposures.” - Sandler O’Neill & Partners Report, Lehman Brothers Holdings Inc. (June 9, 2008), at p. 1
• “Leverage is down a lot (and even more post capital raise) . . . illiquid positions are down 15%?20% . . . .” UBS Investment Research, First Read: Lehman Brothers (June 9, 2008), at p. 1
• “While LEH reduced gross leverage from 32x to 25x, increased their liquidity pool from $34B to $45B, and drove reductions across most troubled asset classes (and reduced total assets by $130B or 17%), we await more details on total remaining troubled assets in aggregate as well as a L?III or illiquid asset update to help answer the question of whether $6B in incremental capital raise is sufficient.” Bank of America Equity Research Report, Lehman Brothers Holdings Inc. (June 9, 2008), at p. 1
• “[T]he firm aggressively de?leveraged in the quarter as total balance sheet assets declined by $130 bn and net assets declined by about $60 bn, bringing gross leverage to 25.0x from 31.7x and net leverage to 12.5x from 15.4x. This broad based selling likely exacerbated the write?downs the firm took this quarter. As part of its de?leveraging, Lehman reduced RMBS and CMBS exposure by 15?20%, leveraged loans by 35% and high yield by 20%. While Lehman is clearly not out of the woods just yet, we believe today’s
  announced capital raise will reduce investors’ fears and help promote a better liquidation of assets should LEH want to continue to reduce its leverage." Goldman Sachs Report, Lehman Brothers Holdings Inc. (June 9, 2008), at p. 1
• “Despite the negative results this quarter, there were some positive takeaways: Balance sheet and leverage reduced . . . . Riskier assets cut . . . .” Buckingham Research Report, Lehman Brothers Holdings Inc. (June 9, 2008), at p. 2
• “Overall, we believe the company’s moves to de?leverage the balance sheet are positive factors from a ratings perspective." CreditSights Report, Lehman Brothers Holdings Inc. (June 9, 2008), at p. 4
• “LEH reduced its balance sheet by $130bn (or 17%) and reduced net assets by $60bn. Even despite the large loss, this drove net leverage down to 12.5x and gross leverage below 25x. After the announced capital raise of $4bn in common equity and $2bn in mandatory convertible preferred, we expect gross leverage on a pro forma basis to fall to close to 20x and net leverage to fall to 10x – by far the lowest in the industry (25% – 35% lower than peers) . . . . [M]anagement noted that much of the sell down was focused on the riskier and less liquid assets, rather than the high grade and more liquid securities.” Buckingham Research Report, Lehman Brothers Holdings Inc. (June 9, 2008), at p. 2
• “The company’s gross leverage ratio improved to 24.3x (vs. 31.7x in 1Q08 ) and its net leverage ratio decreased to 12.0x, down from 15.4x in the prior quarter. The improvement in the leverage ratios were driven by lower asset levels, partially offset by a drop in equity as the firm delevered its balance sheet. Lehman noted that it had finished the balance sheet de?leveraging it wanted to achieve, but it had not achieved the balance sheet mix that it wanted. So, we sense the company will continue to opportunistically dispose of mortgage?related exposures and leveraged lending.” CreditSights Report, Lehman Brothers Holdings Inc. (June 16, 2008), at p. 2

Oddly enough, none of these analysts highlighted the main risk, which was, oh, I don't know, BANKRUPTCY?

Comments

[bugs_]

Church Lady says, "oh, I don't know, BANKRUPTCY?"

[Anonymous]

There appears to, perhaps, be too little focus on the Q1 earnings. That report almost laughably showed a "profit" of about $500MM, conveniently beating the Street but down marginally from the prior year. They were eloquently presented by Ms. Callan the day after BS blew up, crushing the shorts....and better yet, enabling
mighty Lehman to put out the word that they were "attacked" by short-sellers and predatory rumor-mongering, the SEC was investigating cases they had reported, etc. This, while stating that Fed officials were on-sight looking at the books. Every critical voice (save Einhorn) clammed up out of fear. Then LEH sold securities to the public off the back of those numbers.

While not defending any of the above-cited comments, the message to the Street was basically, "...even though you know they're BS, you need to believe Lehman's numbers because they'll get away with fudging for as long as they want."

[Anonymous]

The same could be noted about the analysts following AIG in the years preceding their collapse, and AIG was not moving the stuff off the books. Analysts are not paid to be investigators, they are paid to promote. Writing "blah, blah, blah" is a helluva lot easier than making a few phone calls and actually understanding what is behind the numbers. Has not it always been thus?

[deadhead]

Thank you for this piece...very well done.

We now have the undisputed facts that most of our larger banks are insolvent or near to insolvency.  Each of those institutions and their sell siders have rated just about all of each other as healthy, strong, super duper pooper buys, etc. in an attempt to do the same thing that we see demonstrated in this article.

it's one thing to be sucker buying US common equity, but it is downright suicidal to buy common in most U.S. banks.  

[Howard_Beale]

Check your gmail...

[Howard_Beale]

redundant

[Fritz]

Now the sell side just skips the flowery jargon and goes with "The taxpayers will bail you out so just buy Buy BUY!"

[ghostfaceinvestah]

Why just pick on the sell side?  I am sure Bill Miller owned some LEH before the blowup.  After all, he was the SINGLE LARGEST SHAREHOLDER of FRE the day it went under.

[BlackBeard]

Short Bill Miller in bear markets.  He's a one trick pony.

[Anonymous]

Does "SELL" exist in the sell side lexicon?

The last year has been full of "the company beat expectaions". Revenues are down but companies "increased? profits" by cannabilising themselves.

These guys should all be in jail!

[wagefreedom]

Ah Jay-sus-- a distinct and thorough belly laugh at that first sentence TD-- luv ya dude!

[Chopshop]

asking a sell-side anal-syt for critical thought is like asking mickey mouse directions to six flags.

[berlinjames02]

Here's a GREAT video of Einhorn teaching the Squawk idiots about the accounting problems at Lehman in June 2008. The point he talks about... accounting numbers changing AFTER the quarter ended. Seriously, is revaluing $1B two weeks after the quarter ends that big of a deal?? 

My favorite part is the clip from Fast Money where David Trone of Fox Pitt, Kelton says "David [Einhorn] is looking at data from an inexperienced viewpoint. He doesn't understand investment banks". Also, notice that Merrill 'upgraded' the stock around the same time as the clip.

Here's 12 minutes 31 seconds of Einhorn glory:
http://www.cnbc.com/id/15840232?video=762094306&play=1

[berlinjames02]

Also, I highly recommend Einhorn's book "Fooling Some of the People all of the Time". It's a great read for anyone interested in the different tricks accountants performed at Allied Capital to revalue assets upward and avoid losses. Pretty much the EXACT opposite of what's now occurring with the FDIC assets, except for the fact the taxpayer is backing the vultures swooping in to pick the FDIC carcass clean.

See here if you don't know what I'm talking about:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axnpzq.OM0BY

[BlackBeard]

Any "buy" ratings on Greek Sov debt lately?

[Miles Kendig]

The what, where and when is validated once more.

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