Lehman Brothers (LEHMQ)

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.

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.

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 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.”