Layman...oops, I mean LEHman.

Hey everyone,

I was worried as I drafted this article about Lehman that there would be a concluding development around whoever the heck decides that a share of Lehman is worth more than an extra large value meal at McDonald's. But, oh well, here goes:

So, for the whole year Lehman has constantly been saying, "We're fine, we're fine, we've got tons of cash."

What they neglected to emphazie is that the still have 42 Billion in subprime CDOs.

So, of course, they said on Wednesday, we'll sell part of us, and that'll make people feel better!

- Apparently, it made people feel so good the stock dropped 40%.

Then on Thursday they say, "Okay, Okay, we'll sell all of us"

- That made people feel so good, the stock dropped ANOTHER 30%

Paulson then says that he will not bailout Lehman.

- The stock drops another 10%.

The CEO orders chicken salad for lunch.

- Stock goes up 2%.

My favorite part happened after Lehman said they wanted to sell the whole company:

Goldman Sachs, about 5 minutes after Lehman's annoucement, has an anonymous source through some news publication say that they have no interest in Lehman.

Prefontaine couldn't have run away that fast from Lehman.

But seriously, there is something odd going on with the share value of Lehman. As recently as a week ago, Lehman was believed to be valued at between 8 and 10 billion. This is the value of their Neuremburger unit- which is their super-excellent investment banking arm....and has been generally accepted as the value by analysts and investors. Therefore, Lehman should cost between $11.50 and $14.50 per share.

As of 12:18 pm on 09/12/2008, it is trading at $3.55 - a total value of 2.47 Billion.

Now, a week ago, I would have been shorting Lehman...but at this valuation - it seems the right thing to do is to BUY Lehman. Unless there is some magical reason that the value of all the CDOs has magically changed by as much as 7.5 BILLION dollars in the last week. The other factor which makes me think that Lehman may be undervalued - and that is what led to the purchase price of Bear Stearns being raised from $2 per share to $10 per share. Bear Stearns, like Lehman has much of its shares held by employees. Therefore, the employees are much more likely to argue for a 8 to 10 billion valuation.

One critical difference though.

JP Morgan's buyout of Bear Stearns was backed by the federal government and, as Treasury Secretary Paulson said, Lehman's may not be. Therefore, its not exactly the same low cost situation for any potential Lehman buyer...and that's the big risk anyone who buys Lehman stock is taking. A buyer could argue that with Lehman's leveraged position - the total assets Lehman owns when sold cannot cover the money borrowed to purchase them. Without federal backing - no bank is willing to take what has a reasonable potential to amount to a severe loss.

Honestly, I think Lehman should just default on the debt. The more deflation we have, the lower gas prices go. I'm always a fan of that.

-Mansij Hans
Member, Intigril Capital Management