Losses and Losses

11 June 2008



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Lehman to Raise $6 Billion to Survive

Lehman Brothers will not be following Bear Stearns into Wall Street extinction despite posting a $2.8 billion loss in the first quarter. That’s about 10 times the anticipated loss of $300 million. To right the ship, Lehman will raise $6 billion in a rights issue. What isn’t going to happen right now is a bail out by a commercial bank, nor is Lehman going to start making any serious money any time soon.

Richard Bove, an analyst with Ladenburg Thalmann & Co, a Miami-based brokerage and investment bank, told Reuters Investment Outlook Summit in New York on Monday that Lehman has only $25 billion in equity and a balance sheet of $800 billion. “Any bank that took them over would immediately have problems,” he said. He believes Lehman won’t be a takeover target until they clean themselves up.

Lehman has taken steps to fix the balance sheet problem. The bank has been working on strengthening its balance sheet since March, and there appears to be progress on that front. It has $45 billion in liquidity, and the Wall Street Journal reported yesterday that “Lehman has sold some $30 billion of mortgage assets to hundreds of investors.”

Unfortunately for Lehman, that may not be enough. David Einhorn, a hedge fund manager at Greenlight Capital, has been an aggressive short on Lehman stock for some time. Mr. Einhorn says there’s $65 billion of hard-to-sell assets still on Lehman’s balance sheet, and he has been making money on Lehman’s declining stock price. If he says there’s more to go, one wouldn’t bet the grocery money against him.

Lehman CEO Dick Fuld is the man who got Lehman into the mortgage-back securities game, and he’s held that job for 25 years. He’s seen the bank through early 1990s mortgage crisis, the Long-Term Capital Management collapse of 1998 and the popping of the Internet bubble in 2001. He’s diversified the company to the point that half its funds come from outside the US. However, maybe he’s been there too long. And maybe getting Lehman into this mess is a big enough mistake to warrant replaing his team with new management.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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