Showtime: Lehman’s Last Shot?

Will Lehman Brothers shareholders go down as hard as the L.A. Lakers this week? Yes, it is showtime, and according to David Einhorn, Dick Fuld & Co. have more in common with the Lakers than, say, Lloyd Blankfein:

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. Einhorn on Lehman, April 2008

Razzle dazzle no-look passes might work in the NBA, but the clock is ticking for Lehman Brothers.

Today's capital raise was pretty much telegraphed last week, and pricing the deal in the hole was a given. And your position on this fight might depend on which capital ratio you are willing to embrace. And while today's events are material, the most important day in Lehman's history was in mid-March when they bought themselves time to come up with something. And last I checked, the lights were still on at their corporate HQ.

They backed themselves into a bad spot for sure, but did what they had to, de-levering, raising capital and letting go of fully 25% of its workers. Too little too late maybe, according to the bears, but to get to zero they will have to go through Brad Hintz, who knows more about this than either you or I, given he served as Lehman's CFO. That might give you pause, and the bears might have to discredit some of his arguments to get the stock to crack the new line in the sand, $28 a share:

...we think it’s highly unlikely that the marks on Lehman’s trading positions are being “aggressively” managed by Lehman’s new CFO. A new CFO’s first worry is not managing earnings; it’s inadvertently violating Sarbanes Oxley or an SEC rule because a mistake hs crept into the company’s financials.

Wall Street CFO’s know that they rely on the accuracy of the numbers that are prepared by hundreds of individual controllers and, therefore, rely on the ethics of their accounting staff. There simply is no way for a CFO to check every number related to an $800 billion balance sheet by him or herself. Bernstein Research Note

Hintz’s note is a must read for anybody looking to keep on a position here, but he is clearly pro-Lehman, in case you are not. Both sides have reached deep into their bag of tricks, but Lehman’s franchise is headed the way of the Lakers, circa 1992.

The cult of Lehman has been forced to sober up quickly, much like the fans of several value guru’s. With Bill Miller and Whitney Tilson down 20% year-to-date, and over the trailing 12 months, respectively, Bill Ackman mis-timing his position in Target Corp, and even Einhorn taking a hit in New Century Financial, nobody is escaping the pain this market has dished out.

Einhorn made his point, and if I take anything away from this, it is several other brokers remain vulnerable. Perhaps they are easier trades than Lehman.

Hintz might be preparing to write another note; although I doubt his position changes based on today’s events. No doubt Tom Brown will be the first to know, his redesign of bankstocks.com is complete, and he is often in the thick of firefights in financials, right or wrong. But the next two hours might very well decide Lehman’s future.

$28 is huge, and it was just tested again.

This might be the last chance Lehman has to raise capital, however, given the cost of capital its stock now implies.  Yes, Lehman might eventually be sold, although I have no idea who is in a position to buy them, a point that plays to the bears thesis. But there is much low hanging fruit in financials outside of this stock, and even Goldman’s valuation cannot escape that giant sucking sound.
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Dick Bove has long maintained Lehman survives:

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Charlie apparently slept in:

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Update:
The events at Lehman have been leading up to this point. $28 is the the line of death, and it held, for now. Who covered all those puts? Erin Callan is strutting her stuff, claiming she will not raise any more capital. Do you believe her? She might have a better chance with the stock at $40 than $20, if she ever needs to.

And while hedges, by design, should lose money, the Street seems to be particularly poor at designing them, as the Financial Times notes.
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Lehman Brothers: Addressing the Bear Case
Bernstein Research (PDF)
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