Lehman on the Ropes Again, Looking to Raise Equity

Lehman managed to escape the same fate as Bear Stearns around the Ides of March partly due to the heroic intervention of the Fed, in part to reporting first quarter profits. A member of the skeptically-minded short cohort described the earnings as a sham, and noted that they depended entirely on counting the increase of their debt spread as a gain. And there were other red flags: changes in the way the firm measured leverage (and leverage increased nevertheless); a claim that their hedge for their Alt-A exposures was mortgage servicing rights; unrealistically flattering marks on commercial real estate and high yield. And the conference calls were described as Orwellian.

But the Street gave Lehman a pass, since if they went over the brink, who knew who might be next (UBS was the next on most lists). But sentiment appears to have taken a sharp turn. Ben Bitroff provides this tidbit

The open interest in LEH puts is absolutely massive, especially at strikes that would only pay off if LEH completely imploded (a la Bear Stearns). Either some idiots are going to be out a lot of money come June, July and October… or LEH implodes before then…

The open interest is absolutely massive and can only pay off if LEH collapses. Most of the open interest is at sub $35 levels… a level that LEH has now breached. A lot of the puts at the ‘bankruptcy’ strikes (say anything below $15) also expires in June. So either the put buyers or LEH are quickly running out of time….

Will Lehman implode? I don’t know. I can’t tell… I just don’t have enough information. The rumors continue to make their rounds and traders are definitely nervous.

And we have an early AM story now the lead item at the Wall Street Journal, presumably based on a Lehman response to the high short interest, rumors, and expectations that the firm will report a quarterly loss:

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.

In addition to a debt downgrade yesterday, the other triggers were equity analysts cutting their marks:

Also Monday, Merrill Lynch analyst Guy Moszkowski lowered his rating on Lehman stock to underperform from neutral. Oppenheimer & Co. analyst Meredith Whitney swung her earnings forecast to a loss from a profit.

Moskowski has long been a top-rated Institutional Investor analyst for investment banks; Whitney has cred due to her early and accurate calls on Citi, so these were particularly damaging calls.

The article also notes that Lehman was stung by real estate related hedges that fell in value as the underlying positions went south. The firm is expected to raise new funds as common equity (its last offering was preferred stock).