Bernstein's Brad Hintz on Lehman

Hintz, the ex-CFO of Lehman, offers his perspective on the brokerage firm's turbulent times to Maria Bartiromo

by Maria Bartiromo

Jennifer S. Altman

The drumbeat of negativity driving down the shares of Lehman Brothers (LEH) has been growing louder, with reports on June 3 that it is likely to seek $3 billion to $4 billion in additional capital. As of that day, Lehman's market cap was down almost 60% from a year earlier and its stock was off more than 18% over three trading days. One of the chief drummer boys has been David Einhorn of Greenlight Capital, a hedge fund shorting the stock. In an interview with me on May 28, Einhorn suggested Lehman was not being forthright about soured investments. Lehman CFO Erin Callan has been trying to calm nervous investors, and her face-off with Einhorn was the subject of a story in The New York Times on June 4. For a less passionate perspective on Lehman, I called brokerage analyst Brad Hintz of Sanford C. Bernstein. In the late '90s, Hintz was Lehman's CFO.

MARIA BARTIROMO

Why is Lehman getting hit so hard and losing so much market value?

BRAD HINTZ

What you're getting now are equity investors who are very nervous about brokerage firms. They don't like surprises. They're acting first and asking questions later. Why take a chance when so many of them got hurt by Bear Stearns (BSC)? The interesting thing is the fixed-income investors are much more sanguine…. Part of it is they know that brokers can survive a funding problem if counterparties have confidence in the balance sheets. And right now, what you've got is an ironclad commitment from the Federal Reserve to back up the brokerage firms at least through the middle of September.

Lehman has been issuing massive amounts of long-term debt and raising capital since the failure of Bear. What are you doing when you're doing that? You are building a cushion of cash so you don't have to rely on short-term funding. Now, I spoke to the treasurer of Lehman on the Friday before Memorial Day. He said Lehman had $8.5 billion in commercial paper outstanding at the end of the first quarter and less than a billion dollars of commercial paper outstanding now. That's very important because commercial paper is the most credit-sensitive money—the money that's most likely to go away in a crisis. They've done away with it.

Press reports and your own research suggest that Lehman will try to raise $3 billion to $4 billion in capital. Will it be closer to three or four, and will that be enough?

I think it's going to be closer to $3 billion because Lehman is talking about the end of June. That's when the firm will have taken its risk levels down and will be positioned for the future. Why do they want to do it rapidly? Because mid-September is when the Fed discount window is going to go away. So you want a bulletproof balance sheet by mid-September.

Some people will say, "Look, there are so many bad assets on the balance sheet. Why don't they just bite the bullet and take another charge or writedown and get them off the balance sheet?"

Here's the problem: I met with the head of risk management for one of the top four brokerage firms, and the comment he made was, talking about his residential mortgage bank portfolio, "We know what the value of the bottom tranche is, we know what the value of the top tranche is. But we have no idea what the value of the middle tranches are." You've got knowledgeable people trying to make the best assumptions, but it has the accuracy of horseshoes. You've got no way to get rid of the stuff, and so the problem for all the Wall Street firms is there's really no place to go on this.