Lehman Brothers executives appear to have been overcome by optimism. While reporting dismal third-quarter earnings of 70 cents a share – way down on sell-side analysts’ consensus of 85 cents a share – Lehman CFO David Goldfarb made a point of stressing that the firm’s backlog of deals across the board was looking quite healthy.
High-yield and high-grade bond issuance backlogs rose $8 billion apiece this quarter to $27 billion and $24 billion respectively, compared with the end of 2001, while M&A hit $62 billion, up $9 billion. The backlog for equity issuance, meanwhile, was up $500 million to $11 billion.
Exaggerated notions?
CSFB’s brokerage analyst Joan Solotar wasn’t convinced. “The equity numbers you talked about are bigger than the filed numbers for the entire industry,” she pointed out to Goldfarb on the conference call. “We’ve heard much talk from the brokers for the last several quarters that the pipelines are increasing, yet we continue to see decreases in investment banking revenues.”
That might just be because Lehman isn’t limiting itself to talking about deals already filed. “We include items which are in the process of being filed,” replied Goldfarb calmly. To give him his due, he had mentioned earlier in the call that what he called the pre-pipeline figure was much more robust than the actual pipeline, by which he means, for the equities market at least, the prospective deals already filed with the SEC.
In other words, Lehman appears to have thrown into its equity pipeline figure almost any deal discussed with clients, irrespective of when such deals will get done, if at all. As Solotar wrote in a note later in the day, “these [pipeline figures] are coming off of low levels and the definition of pipeline shows no time horizon or probability of completion.”
Most of the brokers have reverted to such wishful thinking, harking back to the good old days when they could pretend that fee income was here to stay, but none have been as brazen about it as Lehman. It is, at least, based on a sound observation. “There is a pressing need for companies to restore balance sheets by re-equitizing,” Goldfarb told analysts and investors on the conference call. The only problem is that bankers have been saying that for over a year, and they still have no idea when it might actually start to happen.
The last thing investors want or need is for corporates to massage their earnings expectations. That’s one of the reasons we are in this mess to start with.
