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Bloomberg News reports that Lehman Brothers Holdings (NYSE: LEH) wants to sell $4 billion in equity. But it already raised $6 billion so why does it need more? It should be no surprise -- but thanks to a chorus of statements by financial leaders that "the worst is over" -- including Lehman's CEO Richard Fuld, Jamie Dimon, Hank Paulson, and Barton Biggs some are surprised that there are still problems.
Since the crisis began -- last August when the Fed began cutting rates from 5.25% to 2% -- banks have been trying to reduce their ratio of debt to equity below the hugely risky 32:1. But it's hard when they hold $500 billion worth of Level 3 assets -- which don't trade and therefore have no objectively set market value. To maintain or improve their capital ratios, banks have been writing down the value of the securities on their books -- $276 billion worth so far -- and simultaneously raising capital. Citigroup (NYSE: C) has raised the most -- $44 billion.
S&P downgraded Lehman, Morgan Stanley (NYSE: MS) and Merrill Lynch (NYSE: MER) saying they may disclose more write-downs for devalued assets. And hedge fund manager David Einhorn -- who's short Lehman -- got into a verbal debate with Lehman CFO Erin Callan arguing that Lehman had failed to disclose $6 billion worth of such Level 3 assets -- known as Collateralized Debt Obligations (CDOs) and it needed to raise capital. Today's announcement suggests that Einhorn was right.
Just because executives act like cheerleaders, it doesn't mean investors should take them at their word.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares and has no financial interest in the other securities mentioned
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Reader Comments (Page 1 of 1)
6-03-2008 @ 12:04PM
David Huston said...
Whatever happened to the Trillions of dollars of credit default swap obligations? Is Lehman part of that ugly picture?
6-03-2008 @ 12:04PM
william lindblad said...
Is the worst over?
In one word - NO.
The only news that the U.S. investor seems interested in is the domestic front. Since we have difficulty getting true answers here, what make one think that you would get them abroad? There has to be a lot more out there that we have yet to hear about. While the amount of write down is immense, so was the orginal investment. The orginal is so immense that it could not all have been reaised from the U.S. alone. Consquently, we know about the U.K and Europe, at least in part, and they have taken a hit also. I find it difficult to believe that all the bankers in Asia were sitting on their laurels and watching this mad dash for the gold take place. So far the Eastern front is being very quiet and regulation over there is not the same as here.