Worst Ahead Of Lehman

In April, Lehman CEO Richard Fuld stated "The worst of the impact on the financial-services industry is behind us."

Today, the Wall Street Journal is reporting Lehman Plans Higher Capital Raising, Expects to Post $2.8 Billion Net Loss.

Lehman Brothers Holdings Inc. said Monday it lost $2.8 billion in the second quarter and plans to sell $6 billion in stock to beef up its capital base.

Chief Financial Officer Erin Callan said in a conference call that the company has completed its develeveraging program of selling assets and raising equity, and is using its new capital to expand its business.

My Comment: Excuse me but if you have already "completed" raising equity then why are you still raising capital? Perhaps you mean you will be finished after this round, but I am willing to bet against it.

Lehman plans to raise $4 billion by offering 143 million shares of common stock at $28 apiece, expanding the bank's shares outstanding by 25%. The company is also selling $2 billion in preferred shares that will carry an 8.75% yield and be convertible into common stock in a price range between $28 and $33 each.

The projected loss, the first since Lehman went public in 1994, is four times worse than Wall Street's most pessimistic estimate, highlighting the consequences of the bank's huge buildup of mortgage and LBO debt during the credit boom. The stock sale is also bigger than analysts had expected.

Lehman expects a net loss for the quarter ended May 31 of about $2.8 billion, or $5.14 a share, with negative net revenue of about $700 million. Net revenues reflect interest costs.

The damage was driven by write-downs and hedging losses. Analysts surveyed by Thomson Reuters were expecting a loss of 22 cents a share on revenue of $2.62 billion. The lowest estimate was for a loss of $1.28 a share.

My Comment: That loss makes a mockery of the April statement that the worst is behind Lehman. The question now is whether this is it. Again I doubt it.

Lehman's stock sale will significantly dilute the holdings shareholders already suffering due to a drop of more than 50% for Lehman's shares this year. The sales, however, could ease concerns about the bank's liquidity, analysts at Goldman Sachs and UBS wrote Monday morning.

My Comment: If anything, the stunning loss should increase not ease concerns of Lehman's liquidity.

Lehman's release contained some news that may help the bank fend off critics. In addition to the big increase in liquidity, Lehman said it cut its exposure to risky M&A loans by 35% and lowered its exposure to residential mortgages, commercial mortgages and real estate investments by 15-20% apiece. The bank said it reduced its leverage -- the multiple by which its borrowings exceed its equity -- to 25 times from 31.7 times at the end of the first quarter.

My Comment: Since when does a $5.14 a share loss fend off critics. And since when is leverage of 25 times anything to brag about. Lehman is still hopelessly overleveraged and they are going to continue to pay for it.

Still, there is no escaping the firm's woes. Its massive second quarter loss comes as some financial CEOs have suggested the credit crisis is the seventh inning and may be abating. Firms like Merrill Lynch have already logged billions of dollars in mortgage-related losses. In April at Lehman's annual meeting, Mr. Fuld said the environment will remain challenging for several quarters but added: "The worst of the impact on the financial-services industry is behind us."

Lehman Battles an Insurgent Investor

The New York Time had an interesting article out last week called Lehman Battles an Insurgent Investor.

For eight months now, Mr. Einhorn, a rabble-rousing hedge fund manager, has pilloried the venerable Lehman Brothers in an effort to drive down the bank’s stock price, which he is betting against.

Lehman Brothers is not amused. In recent weeks, the bank’s chief financial officer, Erin Callan, has tried privately to rebut Mr. Einhorn to nervous investors, who have feared for Lehman’s health ever since Bear Stearns succumbed to a panic. But despite Ms. Callan’s efforts, Lehman’s stock keeps falling: It tumbled 9.5 percent more on Tuesday, in a deluge of selling, bringing its loss for the last 12 months to 59 percent.

The battle over Lehman has captivated Wall Street and left the bank struggling over what to do next. The bank, which is expected to post a quarterly loss of roughly $1 billion in a few weeks, may also raise capital to shore up investor confidence.

Mr. Einhorn, who runs a $6 billion hedge fund called Greenlight Capital, has been profiting from the Lehman’s growing pain. Critics say he is needlessly fanning fears about the precarious health of the financial industry at the very moment executives are struggling to stabilize their ailing companies.

Lehman’s management has spoken with some analysts about Mr. Einhorn, but they have declined to comment publicly beyond a statement that says Mr. Einhorn “cherry picks” and misconstrues information.

“They’re furious,” Mr. Hintz said. “If you get distrust of your accounting, then it affects the valuation of the company forever going forward.”

Within Lehman, workers are calling Mr. Einhorn’s strategy “short and distort.”

Aside from Lehman, Mr. Einhorn would not say if he is long or short other financial companies.

Cherry Picking Data?

Now we see who had it right and who had it wrong. If any credibility should be called into question it is that of Lehman and Lehman's defenders.

"Lehman Brothers is not amused."

Nor are shareholders.

Lehman (LEH) Daily Chart



click on chart for sharper image

Technically it looks as if the stock wants to test the liquidity rumor reaction low back in March. Let's see what happens if and when it gets there.

Sedacca Chimes In

Minyanville professor Bennet Sedacca weighed in with these thoughts this morning.

We have been hearing about Lehman (LEH) for a year now and that has intensified of late. I've been asked what I think about the capital raise and the firm's loss announced this morning.

I will say this. LEH is raising capital because it needs to. Just like everyone else. Why it continues to pay a dividend is beyond me. This deal is highly dilutive and is rather necessary.

The greatest description of all, however comes from none other than David Einhorn. Einhorn says 'Lehman is raising capital it said it didn't need to replace losses it said it didn't have'.

LEH is not an isolated event, folks. There will be many more of these deals. And at some point, the buyers will walk away. that's when the real fun starts.

From where I sit the worst is still ahead of Lehman.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List