Interest Rate Roundup

Tuesday, June 03, 2008

Is Lehman passing the hat around ... again?

Back in April, the CEO of Lehman Brothers declared that the "worst is behind us" as far as the credit crisis is concerned. In fact, Richard Fuld was just one of many financial executives and government officials who repeated that mantra. Now, according to the Wall Street Journal, Lehman is going to be forced to raise even more capital on top of the $6 billion it already rounded up since February. An excerpt:

"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. The amount of new capital under consideration suggests Lehman's quarterly loss could be larger than the $300 million or so that some analysts have been expecting.

"On Monday, shares in the 158-year-old firm fell $2.98, or 8%, to $33.83 on the New York Stock Exchange after negative comments from two Wall Street analysts. The shares are down almost 50% this year compared with year-to-date drops of about 20% for rivals Goldman Sachs Group Inc. and Morgan Stanley. The new capital would likely be raised by issuing common shares, diluting current shareholders, people familiar with the matter said."

How did Lehman screw up? According to the Journal:

"During the second quarter, Lehman was stung by hedges used to offset losses in real estate and other securities, according to people familiar with the matter. The firm bet that indexes tracking markets such as real-estate securities and leveraged loans would fall. If that happened, it would book profits that would make up some of its losses from holding these securities and loans.

"However, in an unexpected twist, some of the indexes rose, even as the assets they were supposed to hedge against continued to lose value or stayed relatively flat. Lehman's losses from both write-downs on assets and ineffective hedges will likely top $2 billion, people familiar with the matter said. Lehman will also realize additional losses related to its decision to reduce its work force, according to a person familiar with the matter."

The bottom line: No one knows how deep this rabbit hole goes. And that's not a comforting thought.


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