Lehman’s Callan Skirting the Issues, says David Einhorn

David Einhorn, the soft spoken founder of hedge fund Greenlight Capital, is stepping up his attack on Lehman Brothers, taking his story to the assembled masses earlier this week at the Ira Sohn Research Conference Foundation.

The annual gathering is the next best thing to the Value Investing Conference (VIC) for money managers looking to pitch their ideas to a captive audience; Bill Ackman's assault on the monoline bond insurers at the VIC has made attendance mandatory and these mindmelds are a layup for lazy money managers looking to be spoon fed ideas and piggyback the pro's:

David Einhorn has a thing or two to say about Erin Callan's purported transparency.... In a speech at an investor conference earlier this week, Einhorn went into great detail trying to demonstrate how little transparency Lehman actually has about its balance sheet, and specifically where there were discrepancies between what Callan announced to analysts during a conference call in March and what was included in its quarterly filing several weeks later. Portfolio

Megan Barnett, of Portfolio, noted that Einhorn made errors in his analysis, albeit minor. But as HedgeWorld emphasizes, he is incredulous over the company's disclosure of Level 3 assets:

Mr. Einhorn said that in the fourth quarter, Lehman disclosed in its 10Q filing with the Securities and Exchange Commission $38.8 billion worth of Level 3 assets followed by $40.2 billion in the first quarter for that same category.HedgeWorld

“But those 10Q changes did not reflect what the company announced in its conference calls and press releases,” Mr. Einhorn said. He said that when mentioning the discrepancy to Lehman’s management, he was told that gaps sometimes exist between 10Qs and earning calls. He said that he was not convinced by the explanation.Mr. Einhorn’s final charge was that Lehman’s total disclosed write-downs for its mortgage assets are less than what they should be given the bank’s exposure to those assets.

Lehman has been fending off the shorts successfully for two months, but the weight of their arguments is finally taking a toll on the stock as it sags anew heading into the holiday weekend.

Einhorn’s assault is nothing new, he penned a widely circulated bearish report “Private Profits and Socialized Risk” for the Grant’s Spring Investment Conference in early April, and much like Ackman with the monolines, has bitten down hard and apparently refuses to let go.

Selected Einhorn comments from his Aprill missive follow....

Lehman’s management is charismatic and has almost cult-like status. Lehman management gets tremendously favorable press for everything from handling the 1998 crisis to supposedly hedging in the crisis to not playing bridge while the franchise implodes.

From a balance sheet and business mix perspective, Lehman is not that materially different from Bear Stearns. Lehman entered the crisis with a huge reliance on US fixed income, particularly mortgage origination and securitization. Lehman is different from Bear in that it has greater exposure to commercial real estate and its asset management franchise did not blow up. Incidentally, neither Bear nor Lehman had enormous on-balance sheet exposure to CDO’s.

Instead of addressing questions about its accounting and valuations, Lehman wants to shift the debate to where it is on stronger ground. It wants the market to focus on its liquidity. However, in my opinion, the proper debate should be about the asset values, future earnings capabilities and capital sufficiency.

Given that Lehman has not reported a loss to date, there is little reason to expect that it will any time soon. Even so, I believe that the outlook for Lehman’s stock is dim. Any deferred losses will likely create and earnings headwind going forward. As a result, in any forthcoming recovery, Lehman might under earn compared to peers that have been more aggressive in recognizing losses.

Cutting to the chase, Einhorn is looking for Lehman to raise $55 to $89 billion in tangible equity from where they stood at the time of his report on April 8th. You can read the entire report here.

Following the disputed earnings conference call Callan made the following appearance on CNBC to talk to Maria Bartiromo, which was presumably just after she was high-fiving the Lehman fixed income trading desk:

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This story has little bit for everyone, and pits combatants who know how to play inside baseball on Wall Street. Stay tuned, we certainly have not heard the last of it. Erin wanted to mix it up with the alpha males, and she got it.  But it reminds me of the old saying:

Be careful what you wish for.....
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Hey we go again, heavy put buying in Lehman as the Bears press their case and go for the kill:

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Einhorn sits down with Gregg Greenberg of The Street.com

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An Einhorn in Her Side
Portfolio

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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.

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