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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerBloomberg News reports that JPMorgan Chase & Co. (NYSE: JPM) will take a $1.4 billion charge for leveraged buy out (LBO) loans gone sour. The good news is that the charge represents only 3.4% of its LBO loans outstanding.
Interestingly enough, relative exposure to LBO loans does not seem to correlate with loss of stock market value in 2007. Here's the list of the eight biggest LBO lenders ranked by their LBO loans coupled with the percent decline in their stock market value since their 2007 highs (excluding Deutsche Bank and Credit Suisse):
- JPMorgan: $40.76 billion, -11.5%
- The Goldman Sachs Group, Inc. (NYSE: GS): $31.88 billion, -25%
- Deutsche Bank : $27.27 billion
- Credit Suisse: $27.16 billion
- Lehman Brothers Holdings, Inc. (NYSE: LEH): $21.73 billion, -32%
- Morgan Stanley (NYSE: MS): $20.08 billion, -30%
- Bank of America Corp. (NYSE: BAC): $17.84 billion, -4%
- Merrill Lynch & Co. (NYSE: MER): $16.12 billion, -22%
This suggests that investors are more concerned with problems in hedge funds -- to which Goldman is heavily exposed and in mortgages, a specialty of Lehman -- rather than LBO loans. However, if LBO loans end up going sour, the market might focus more heavily on those banks with the biggest potential losses in this category.
For the time being, it looks like investors perceive a strong retail banking presence -- which Bank of America and JP Morgan enjoy -- as being a fairly good hedge against credit blowups in the hedge fund and mortgage backed securities markets.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
8-20-2007 @ 12:11PM
Adolfo Tur said...
Please explain what LBO means?