Lehman Brothers (LEH)

At exactly 4:39pm Apr 1 08, Lehman announced a share offering to help them with a much needed capital infusion. Moreover, it is very troubling that on a daily basis, new information is uncovered that is verifying what is on top of most investors' minds: The problems are much worse than we are being led to believe. According to PRNewswire: Lehman Brothers to Offer 3.0 Million Shares of Convertible Preferred Stock — Lehman Brothers Holdings Inc. today [Monday Apr 1 08] announced that, in response to investor interest, it intends to offer 3,000,000 shares of Non-Cumulative Perpetual Convertible Preferred Stock. Lehman Brothers also expects to grant the underwriter for the offering an option to purchase up to 450,000 additional shares of the Preferred Stock to the extent the underwriter sells more than 3,000,000 shares of the Preferred Stock in the offering. The proceeds from this offering will be used to bolster the Firm’s capital and increase financial flexibility.

Translation: We need cash. We need it now and we are doing it in a way that will be perceived as beneficial.

“Given the challenging environment and our previously stated view that it will likely continue the balance of the year, issuing convertible preferred is appropriate as it optimizes our funding and accelerates our plan to reduce leverage, and at the same time minimizes dilution to our shareholders,” said Erin Callan, managing director and chief financial officer of Lehman Brothers and a member of the Firm’s executive committee. “We also felt this was the right time as there was a window of opportunity in the market, as we have received significant interest from several key institutional investors, who have been strong supporters of the Firm over time.”

Translation: OH CRAP! We are in deep. Even though we have access to funds through the Fed’s Discount Window, that will look as if we really NEED the money. Maybe we should come up with a plan that seems less desperate. A great way will be to offer bonds, but who would buy those? Hey...what about a preferred stock issue, as it will offer upside if we pull through and a yield? We will not be required to pay dividends as we are with bonds, so if the need arises, a cut is possible. The best part: No worries about ratings! No one really pays close attention to the ratings on a preferred, especially a convertible preferred.

The Non-Cumulative Perpetual Convertible Preferred Stock, Series P, carries a par value of $1.00 per share and a liquidation preference of $1,000 per share (the “Preferred Stock”). Upon conversion, the Preferred Stock will be convertible into shares of Lehman Brothers’ common stock, plus cash in lieu of fractional shares.

The non-cumulative dividend rate, conversion rate and other terms are yet to be determined. An application will be made to list the Preferred Stock on the New York Stock Exchange. The offering of the Preferred Stock is being conducted as a public offering registered under the Securities Act of 1933.

Translation: Get it out there…Don’t worry about the details. Look strong, business as usual.

Lehman Brothers Inc. is serving as sole book-running manager of this offering. The offering will be made under Lehman Brothers Holdings’ existing shelf registration statement filed with the Securities and Exchange Commission.

Translation: Who can we get to help with the offering? What other firm in good-faith would present this to their clients? Maybe we should do it ourselves.

The firm told investors that it had not borrowed money from the US Federal Reserve on Tuesday and had liquidity of “well above” $40bn

With the rumors surrounding Lehman Brothers about how they need another 4 billion of capital, you would think coming out to state they have more than 4 times that amount of liquidity would stave a sell-off.

The Bear Stearns debacle is too fresh in everybody’s minds. The last time a CEO came to deny liquidity problems, it promptly went bankrupt in three days.

If you’re an employee or an investor, you might be thinking of buying puts to hedge the risk of losing your job and your life savings. Perhaps thats why trading of put-options rised to 280,000 contracts, quardruple the 20-day moving average!

The WSJ is reporting that Lehman will announce: "a loss of $1.8 billion or more, instead of the modest profit they previously expected. If the dour projections come true, Lehman's losses since the start of March would total at least $4.5 billion -- or more than the firm churned out in profit during fiscal 2007."

Now this means Lehman will be forced to:

1- Sell valuable real estate business 2- Sell Neuberger Berman 3- Dumped CDO's for pennies in a Merrill Lynch (MER) like firesale 4- Raise more equity through additional common share or debt issuance 5- Some combination or all of the above

Management sucks and the sale of NB is not a good thing for LEH. Its the only division creating revenues for LEH

Cutting real estate assets will not be enough to lift the stock in the continuing real estate melt down. New capital is welcome but dilutive. Lehman remains a poor cousin to JPMorgan and healthier money gathering institutions.

Lehman lost $2.8 billion, or $5.14 per share, during the quarter, in line with the preliminary figures it released last week, the New York-based firm said today in a statement. Leveraged loans were cut to $18 billion from $28.7 billion.

Lehman fell for four straight days in New York trading last week after disclosing the wider-than-estimated $2.8 billion loss, followed by a shakeup of senior management. Richard Fuld, the longest-serving chief executive officer on Wall Street, is trying to convince investors that the firm can weather the global credit market contraction . The issue concerns Lehman Brothers’s net worth. According to their first quarter balance sheet they had assets of $786 billion and liabilities of $761 billion for a net worth (called book value) of $25 billion. But the stock market doesn’t really believe that book value, valuing all of Lehman’s shares at $14 billion.

Of especial concern are the toxic real estate related assets on Lehman’s balance sheet that may very well be worth far less than the value Lehman is carrying them at. According to an article in today’s WSJ, Lehman is expected to report $30 billion in residential mortgage related assets and $35 billion in commercial mortgage related assets. If these are in fact only worth 2/3 of that or $22 billion less, then all of Lehman’s book value is wiped out.

It’s hard to know what their assets are really worth but one can’t help wondering whether the assets aren’t worth enough to cover the liabilities. That is, there is the real possibility that Lehman Brother’s is effectively bankrupt and they’ll have to be acquired by another financial institution a la Bear Stearns.

Volume has spiked massively in Lehman shares over the last two weeks with 20%-30% of outstanding shares trading on a given day (LEH YTD Chart). According to an article in today’s WSJ, Lehman bonds and credit default swaps are holding up well as the market feels like the Fed won’t allow Lehman to fail. But the fear level surrounding the equity has clearly spiked.

Things are starting to get interesting again.

Lehman is planning to grow its number of employees by 10%+ year over year but it may be hard for the company to translate this growth into productivity.

The firm participates in the mortgage business in a number of different areas. There are concerns that the rising defaults in the subprime market may spread to more credit worthy investors. This has the potential of negatively impacting Lehman.

The best summary came form the short seller David Einhorn of Greenlight Capital : " They raised billions of dollars they said they did'nt need , to replace losses they said they didn't have. "

The news was released June 9th, 2008 and helped lower the selling prices of most of the financial sector.

Lehman Brothers announced plans yesterday to raise $6 billion by issuing new shares as the Wall Street brokerage unveiled a larger-than-expected $2.8 billion loss for its second quarter.

The results, which were dragged down by about $4 billion of writedowns on Lehman's mortgage and private equity-related investments, were well below the loss of $300 million to $1 billion that most analysts had predicted. They represent the first loss since Lehman went public in 1994 and compare with a $1.26 billion profit the year before.

Although Lehman did not quantify Britain's contribution to the group's loss in the three months to June, it said that many of the British mortgage-related assets on its books had become virtually impossible to value. This is in marked contrast with its first quarter, when the assets had been fairly easy to value, according to Erin Callan, Lehman's chief financial officer.

Richard Fuld, the chairman and chief executive, said: “I am very disappointed in this quarter's results. However, with our strengthened balance sheet and the improvement in the financial markets since March, we are well positioned to serve our clients and execute our strategy.”