Lehman Brothers may be considering shopping around $30 billion in beat-down commercial mortgage-related assets, according to a report in the New York Post from last Friday, which cites anonymous insider sources. Because it’s not clear what exactly the firm might sell, the effects a sale could have on Lehman’s balance sheet are open to speculation. Bernstein analyst, Brad Hintz, issued a report this morning on the potential outcomes.
“Assuming Lehman sells its entire $29.4 billion commercial mortgage book, the potential Mark-To-Market [sic] hit to principal transaction revenues would range from -$2.8 billion to -$4.9 billion. Assuming compensation and tax offsets, this would reduce Q3 earnings per share for the firm between -$1.19 and -$2.54,” writes Hintz. Bernstein’s current forecast for Q3 earnings is $0.60 per share. If the transaction results in more than a $1.5 billion loss, Hintz says, the firm will likely need to raise capital; under that mark and it won’t.
Hintz is still a believer in Lehman, and projects that the firm won’t fall prey to the same fate as Bear Stearns. “Let us go on the record that we believe LEH will eventually recover. The Federal Reserve is buying time for Lehman and the rest of the securities business by providing access to the funding window through year-end 2008,” he writes. Lehman has been busily lobbying Washington to pass favorable mortgage-related legislation—spending $240,000 according to this Forbes story —but that won’t improve the profile of its sub-prime and other mortgage-related holdings. Like Merrill and the other big investment firms, continued exposure to troubled fixed income markets means more pain for earnings for a while before it gets better. In fact, Bernstein doesn’t expect a credit market recovery until “at least early 2009.” Hintz currently rates Lehman “Market-Perform” with a target stock price of $45.