Einhorn Wins, Lehman Caves

Well that was quick.

Lehman Brothers (LEH-NYSE), who have been involved in a very public spat with hedge fund manager David Einhorn over the capital requirements and accounting treatment, are going back to market to raise fresh capital, according to the Wall Street Journal:

Lehman Brothers Holdings Inc., set to report its first quarterly loss since going public, is considering raising billions of dollars in fresh capital to help shore up its balance sheet, according to people familiar with the matter.

The exact amount of the capital hike isn't known, but analysts and Wall Street executives estimate it is likely to be $3 billion to $4 billion. They said Lehman would probably announce the capital raising in conjunction with its quarterly results, due the week of June 16. WSJ

Lehman's stock has been handled severely by the market over the past week, with a S&P downgrade Monday delivering the coup de grace. Advantage Einhorn for now; Lehman's accounting treatment makes some of this exercise more art than science, at least when it comes estimating how much they will ultimately have to raise, given Fair Value Accounting, aka FAS 159:

Statement 159, formally known as the ``Fair Value Option for Financial Assets and Financial Liabilities,'' was issued in February 2007 by the Financial Accounting Standards Board, or FASB, which sets U.S. accounting rules. It was adopted by most large Wall Street firms in the first quarter of last year and becomes mandatory for all U.S. companies this year, although they have wide latitude in how to apply it, if at all. Bloomberg

The new rule is stupid, according to Robert Willens, who was, until recently, Lehman’s in-house accounting expert:

Companies are allowed to decide for themselves which of their outstanding bonds, loans and other liabilities will get mark-to- market treatment. That’s an unprecedented degree of leeway, said Willens, who is also an adjunct professor at Columbia University in New York.

``It’s kind of a dumb rule,’’ Willens said. ``In the entire panoply of accounting, this is the most flexible and elective and optional rule that we have.’’

Famed entrepreneur Forrest Gump once said that stupid is as stupid does, but Wall Street has taken a vow of Omerta when it comes to commenting further, and adding some badly needed transparency:

Lehman, the fourth-biggest securities firm, has reported $1.9 billion of gains related to a widening of its own bond spreads. Citigroup, the largest U.S. bank by assets, has booked $1.7 billion; Morgan Stanley $1.7 billion; JPMorgan Chase & Co., the third-biggest bank, $1.7 billion; and Goldman Sachs $550 million.  There may be more to come, JPMorgan analyst Kenneth Worthington wrote in a May 28 report. Lehman may book $325 million for the second fiscal quarter ended in May, and Morgan Stanley, the second-biggest U.S. securities firm, may report $470 million, Worthington estimates.

Spokesmen for Lehman, Morgan Stanley, Goldman, Citigroup and JPMorgan in New York declined to comment.

The shortest skirt in Erin Callan’s closet cannot deflect the attention the Journal piece will receive, and tapping the capital markets for another round is a given. No doubt regulators are pushing them to bolster their balance sheet, and quickly. They will raise the money, but the market is clearly exacting a stiff price, given Lehman’s recent uptick in their cost of capital.

Too, the plunge protection team, or a group of fearless traders, seem to be defending the $24 level on the XLF ETF, but only time will tell if it holds support. Selling in May and going away is looking pretty wise, in hindsight, as another long hot summer looms for Wall Street.

Losses Push Lehman To Weigh Raising New Capital
WSJ

Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math
Bloomberg
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Everyone is weighing in, but they might want to distinguish between debt and equity.

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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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