Lehman Expected to Post Another Loss

Readers know that we have been suspicious of Lehman’s claims that they were on sounder footing that the market was giving them credit for and had put the worst of their financial woes behind them. Our doubts were fueled by the number of open questions surrounding their claims of deleveraging and their extremely aggressive spin management and use of leaks to the press between earnings announcements to bolster their case. The combativeness seemed not merely to be a magnification of CEO Dick Fuld’s famously pugnacious personality, but also a backs-against-the-wall reaction, a de facto admission that their situation indeed verged on desperate.

Events seem to be bearing our dim view out. The Wall Street Journal reports that, contrary to earlier forecasts, Lehman is now expected to report a quarterly loss that analysts peg as high as $2.6 billion. Recall that last quarter’s $2.8 billion loss was a stunner, nearly ten times the expected level, and a dramatic departure from the convention of preparing investors for earnings shortfalls.

The Journal also suggests that the expected losses in and of themselves probably won’t necessitate more equity-raising, but if this is not the last losing quarter, the embattled firm will need to look again to bolstering its capital base. After the last turkey (the issue price was $28, the stock is currently at $16.17), getting money from the public markets would be a tough sale.

From the Wall Street Journal:

With the end of the New York company’s fiscal third quarter less than two weeks away, some analysts are girding for 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….

In the past few months, Lehman officials have examined an array of options to bolster the company’s financial position, ranging from selling troubled real-estate assets at a discount to divesting a piece of profitable asset-management unit Neuberger Berman, according to people familiar with the matter.

Yves here. I worked on a project for Neuberger many years ago. Back then it was a phenomenal business, well run, far more profitable than most asset managers. Selling a stake would be tantamount to parting with a crown jewel.

Another stock offering would be hard to pull off without angering existing shareholders, largely because the tidal wave of common shares floated in June has since plunged in value by 42%…

Lehman has been working hard to reduce its exposure to assets causing it big headaches, and the firm’s balance sheet shrank 19% to $639 billion in the fiscal second quarter ended May 31….

But those moves aren’t coming fast enough….Lehman holds $10.2 billion of Alt-A mortgages…David Trone, an analyst at Fox-Pitt, Kelton, predicts that Lehman will write down its Alt-A portfolio by about $1.7 billion, or 17%, at the end of the current quarter…Mr. Trone expects Lehman to pile up overall write-downs of $3.6 billion, offset by $800 million in hedging gains…

Guy Moszkowski, a Merrill Lynch & Co. analyst who last week more than doubled his loss projection to $2.6 billion, predicts that Lehman will take a $4.5 billion hit from write-downs, with about 35% of that offset by hedging…

An additional markdown of as much as 20% related to the firm’s remaining $64 billion in mortgage and commercial real-estate exposure “seems like a lot but can’t be ruled out,” Mr. Moszkowski argues. If that were to happen, Lehman might need to raise more capital.