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What to Make of Lehman Brothers, Morgan Stanley Earnings?


That Lehman's tangible capital grew by only $282 mln is interesting given that net income was $887 mln.

Minyan Peter, who has become quite popular around the 'Ville with readers and professors alike, here shares more thoughts on particular banks' earnings. He also has written a series on the topic: Bank Earnings 101, 102, and 103.

While others can and will opine better than I on whether the investment banks beat or missed its earnings, I have a couple of observations:

On Lehman Brothers (LEH), assets grew by $50.1 bln in the quarter, while tangible equity grew by only $282 mln. That's 178 times leverage at the margin for a business that should run with 20 times leverage. As it was, overall leverage rose to more than 30 times equity from 25.8 times a year ago. Lehman's annualized return on assets (net income/assets) for the quarter was 54 bps. A year ago it ROA was 76 bps.

That Lehman's tangible capital grew by only $282 mln is interesting given that net income was $887 mln. Not sure where the other $600 mln went – dividends, buybacks or "comprehensive income losses." Stay tuned.

On Morgan Stanley (MS), the company reported $1.543 in net income for the quarter. Interesting that common equity was down by $4.26 bln for the quarter. Even estimating for buy backs (9 mln shares in the quarter – about $600 mln) and dividends, it would appear that a big number - $2+ bln (loss) must have flowed through "comprehensive income". Also, even with a $46 bln reduction in assets, Morgan Stanley's leverage ratio increased from 29.8X to 32.3X during the quarter due to the capital decline.

Neither Bear Stearns (BSC) nor Goldman Sachs (GS) provided balance sheet information, however I would provide the following observations on their capital base.

On Bear Stearns, common stockholders' equity fell from $13.3 bln to $13.0 bln, again, notwithstanding $171 mln in net income.

Finally, Goldman's tangible common capital base grew by $660 mln – versus $2.8 bln in net income. The company in its earnings release disclosed that it repurchased 11.2 mln shares at an average price of $219 for $2.45 bln.
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Position in LEH.
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