Banking Junkie

Last Thursday I did some impulsive buying on Lehman Brothers (LEH) at about $4 per share. 200 bucks was as stake. I FULLY ACKNOWLEDGE that it was GAMBLING, not investing.

Let’s go back to the definition of INVESTING:
An investment operation is one which upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.

Buying LEH does NOT promise safety of principle as there is very high possible risk of permanent capital loss. However, it does provide high potential return should LEH manage to survive this financial tsunami as it is selling at potentially 20 to 30 percent of breakup value. Lastly, I did no ‘through analysis’ to arrive at the purchase decision.

I sat in Prof Andrew Lee’s Corporate Reporting class today and he gave a great overview of sources of liquidity and why LEH exhausted most of its sources liquidity.

Some sources of liquidity?
1) Cash on hand
2) Sell assets (real estates, business unit, loans portfolio, etc)
3) Raise debt
4) Raise equity
5) Sell out of better financed companies

Looking at LEH, it tried to sell its assets, but in this turbulent market, there are few buyers. Debt financing for LEH is almost impossible as the cost of debt is prohibitively high due to perceived risk of the bank. Furthermore, there could be NO buyers should the company try to sell either debt or equity. On top of that, even if there ARE buyers, due to the depressed share price, the dilutive effect on existing shareholder essentially wipe out current shareholder’s stake.

Tonight we’ll probably know more about the near term future for Lehman Brothers.

In an email, Yado sent me the following message “Now from countrywide u have ml too lol” 

The interesting turn of events is the announced purchase of Merrill Lynch by Bank of America. It is ironical that I got my BAC shares via my doomed purchase of CountrywideFinancial. And now BoA is getting Merrill Lynch on the cheap. Observing evolution of financial landscape via my brokerage account is indeed interesting :)

USA Today provides quite a balanced and succinct story of the series of financial event over the past month here.