Clusterf*ck at Lehman Brothers

This is truly bizarre. Not Lehman Brothers (LEH-NYSE) stock, its management's actions. Were they forced to defend their stock with a share repurchase after it sold off due to rumors of a capital raise?

Rumors of losses on hedges have been around for days now, but the Wall Street Journal really got the ball rolling to the downside on reports the company would have to raise capital. And then the rumor mill took over:

Tuesday, 2:40 PM
We don't "do" rumors in the 'Ville but we'd be remiss if we didn't pass along our ears to ye faithful.

The chatta--and it's just that, unconfirmed chatta--is that counter-parties are "pulling a Bear" on Lehman Brothers (LEH). In other words, the "rumor becomes reality" scenario is making it's way around the trading wires. I have no insight to the legitimacy of these stories but I'll say the same thing I said about Bear Stearns (BSC) in March. If rumors alone can bring down a franchise, how strong can that franchise be? Minyanville

Some things are better left unsaid; connecting the dots is one thing, running a piece like that is another. Acting on Todd-o's piece would have made for a lousy trade however, and the stock rallied hard shortly after it was ping'ed to the last guy on the deal team.

Stranger yet are the reports coming in during the wee hours, although I doubt the braintrust at Lehman is really getting any sleep tonight. The Wall Street Journal is now reporting that Lehman actually bought back stock today:

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Why is this man smiling?

Herbert H. Lehman (1878-1963)
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Lehman Brothers Holdings Inc., facing a sharp decline in its stock that will make it more difficult to raise fresh capital, did an about-face and began using its own money to buy back its plummeting shares.

After opening only slightly down Tuesday, the Wall Street firm’s shares had tumbled nearly 15% by midday as investors fearing that their stakes would be diluted sold their shares and rumors flew around trading desks that Lehman had gone to the Federal Reserve for funds. Lehman said that wasn’t true.

But a second rumor, that Lehman was buying back shares, turned out to be true, people familiar with the situation said. WSJ

Much like Yves at Naked Capitalism, I am incredulous that they would actually buy back stock, particularly with regulators pushing them to shore up the capital base. Perhaps management felt their back was to the wall and they had to turn the tide in the stock before Mr. market turned the knife and the lights flickered off.

But the story gets even stranger; The Financial Times is reporting that the company is indeed seeking a capital infusion. although in a slightly different form that the Journal reported yesterday:

Maybe not equity capital, but a “strategic stake”, whatever that is:

Lehman Brothers lost $500m-$700m on certain hedging positions in the second quarter, contributing to what is expected to be a larger-than-anticipated loss that may lead the bank to raise more capital by selling a stake to an outside investor.

People close to the matter said Lehman had opened talks with potential investors including asset managers and Asian banks. Analysts have suggested Lehman could look to raise as much as $4bn in new capital. The bank declined to comment.

Lehman has not made a decision on whether to raise more capital, people familiar with the matter said. If it does, the bank is more likely to sell a strategic stake rather than issue common shares. However, all options remain under consideration. FT

Clearly events are moving at a rapid pace, so much so that Lehman’s treasurer was quoted on CNBC today refuting a rumor; CFO Erin Callan was likely too busy to take Charlie Gasparino’s call.

Maybe Lehman has a grand plan, but this seems more like chaos than financial engineering. David Einhorn’s Short and Distort is taking its toll as they put out one fire after another.

Still, calls for Dick Fuld’s head, by at least one blog, are a joke; while there might be some similarities to Bear, Fuld is no Jimmy Cayne.

Forcing him out the door in their hour of need would serve no purpose. Lehman dodged a bullet two months ago, and de-levered reasonably quickly, but probably should have raised additional equity by pricing a deal in the hole when the stock bounced to the mid-$40s.

Maybe Erin was too busy with her photo ops to do a deal, but if she does not rise to the occasion her days on the catwalk will be over, and she will be walking the plank as the ship goes down with all hands aboard.

I have not been too happy with Lehman since they shut me out of the Middleby (MIDD-NASDAQ) secondary nearly three years ago, but I will settle my score with Andrea in Institutional Sales later. It’s a new day on Wall Street, and all eyes are on Dick Fuld and his troops.

Just win, baby.

Update: Gasparino Smacks Down Financial Bloggers
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Disaster? Not really, says Jason Pride of Haverford.

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Lehman Brothers: Rumor or Reality?
Minyanville

Lehman Is Seeking Overseas Capital
WSJ

Lehman hedges lose $500m to $700m
Financial Times
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

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