Friday, September 12, 2008


With one financial giant after another falling in a cloud of ashes and cinders, it seems we have become somewhat desensitize to the threat of economic ruin. We head into the week-end anticipating a deal of some kind for Lehman Brothers Holdings (LEH: NYSE). Who really cares? Most eyes are trained on Sarah Palin and Hurricane Ike.

Lehman appears to be on the brink of insolvency with over $85 billion in troubled assets included those related to real estate loans. So a wealthy uncle is needed immediately.

Treasury Secretary Henry Paulson says not to count on the U.S. government to provide guarantees of any kind. The U.S. is not going to such a soft touch this time, even though both Paulson and Federal Reserve Chairman Ben Bernanke were both in the middle of negotiating the sale of Bear Stearns to JP Morgan earlier this year.

Several large banks have been cited as potential buyers: Barclays (BCS: NYSE), Bank of America (BAC: NYSE) and JP Morgan (JPM: NYSE) again. It seems implausible that any one of them would have sufficient financial strength to manage a takeover without government guarantees. So it seems likely there will be more feigning and faking going on over the week-end than at an NBA All Stars Game. My money is certainly not on Paulson or Bernanke as neither appears to be much good at games of brinkmanship.

As jaded as investor might be with regard to the fate of one more financial services company, it does matter. The longer and messier the de-leveraging process the deeper the discount required for all stocks and the longer it will take to resume normalized valuation metrics.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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