Wednesday, May 28, 2008

Lehman Remains `Undercapitalized,' Einhorn Says

By Josh Fineman and Rhonda Schaffler

May 28 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, needs more capital even after raising $6 billion to recover from credit-market losses, said David Einhorn, a hedge fund manager who's betting that Lehman shares will fall.

``We are nowhere near'' the end of the contraction that left Lehman with about $3 billion of writedowns and losses in the past year, Einhorn said today in a Bloomberg Television interview. ``Lehman is undercapitalized. They continued doubling down as the credit crisis evolved.''

Einhorn, who runs Greenlight Capital LLC, has been criticizing Lehman's accounting in recent months, including comments he made last week at a conference in New York. He said the bank hadn't disclosed its holdings of collateralized debt obligations before the first quarter and wasn't valuing its commercial mortgage-related assets based on market prices.

Lehman fell 36 cents, or 1 percent, to $36.84 at 4:03 p.m. in New York Stock Exchange composite trading. The stock is down 44 percent this year.

``Mr. Einhorn cherry-picks certain specific items from our 10-Q and takes them out of context and distorts them to relay a false impression of the firm's financial condition, which suits him because of his short position in our stock,'' Lehman said today in an e-mailed statement. ``He also makes allegations that have no basis in fact with the same hope of achieving personal gain.''

Fixing Mistakes

Einhorn said he would be ``happy to correct'' any errors should Lehman show him mistakes in his calculations.

Einhorn has claimed that Lehman failed to disclose $6.5 billion of CDOS on its balance sheet until a regulatory filing at the end of the first quarter. Lehman spokeswoman Kerrie Cohen referred to the company's 10-Q filing, which says the $6.5 billion is ``Other Asset-Backed Securities.'' She said CDOs represent a small proportion of the total.

The filing said that those securities are mostly tied to consumer and business lending. The portfolio of CDOs backed by mortgage-related assets, which have declined during the subprime crisis, was smaller than $1 billion, according to the firm. That part of the portfolio has been disclosed in recent quarters.

Lehman is pushing forward with its plan to weather the credit-market contraction by shedding high-risk assets, such as mortgage-backed bonds, and decreasing reliance on borrowed money, or leverage. Since the end of last quarter, the New York- based company has raised $6 billion of capital, bringing its leverage ratio down to 27 percent from almost 32 percent, Chief Financial Officer Erin Callan said earlier this month.

CDO Values

All CDOs had declined in value and the $200 million gross writedown Lehman took on the portfolio didn't reflect market prices, regardless of the combination of assets, according to Einhorn.

``It's essential, from a public interest, that these investment banks de-lever in a very material way,'' Einhorn said in today's interview. ``That will require raising significant amounts of capital.''

Einhorn, 39, drew attention when he began questioning Allied Capital Corp.'s accounting methods in 2002 and sold its shares short, betting the stock would fall. The U.S. Securities and Exchange Commission later said Allied, based in Washington, lacked procedures to ensure that it correctly valued its holdings from June 2001 through March 2003. The company settled the regulator's probe last year without paying a fine.

Einhorn, who's promoting his book ``Fooling Some of the People All of the Time'' about Allied Capital, said ``we are slightly behind in the investment. It's not been one of the worst investments we've had. Certainly it's not what I expected it to be.'' Allied Capital shares have risen 19 percent in the last six years, outperforming the Russell 1000 Index by 5 percentage points.

Einhorn, whose Greenlight owns homebuilder M.D.C. Holdings Inc., the builder of Richmond American Homes, said that the housing market hasn't hit bottom yet.

``I don't think we are anywhere close to a bottom,'' Einhorn said. MDC ``is a very good company in a tough industry. You have a company that has pretty much no net debt at this point that always runs less levered than their peers. It's a very smart and savvy management that's in eventual growth markets.''

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