Lehman Can't Shake the Monkey

Portfolio.com

Tuesday June 3, 7:30 am ET

Lehman Brothers may blame its sinking stock price on short sellers and rumormongers, but it is facing its greatest challenge to date as it is about to report its first quarterly loss since going public in 1994.

The issue is credibility. The boasts about liquidity and the talk of transparency haven't dispelled the questions about Lehman's balance sheet and its huge portfolio of debt securities.

Now Susanne Craig of the Wall Street Journal reports that Lehman is considering raising billions of dollars in new capital—perhaps as much as $4 billion, according to analysts and Wall Street executives.

"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," Craig says.

Felix Salmon points out that Lehman's troubles this quarter are a result of brutal market conditions and because of the firm's difficulty in hedging their positions.

"We've seen this movie before, most memorably at Bear Stearns," Salmon says. "The fact is that during a credit crunch, when you're stuck with illiquid assets, you can't hedge them. You can sell them at a loss."

"Could it be that Lehman, even after seeing what happened at Bear, is making the same mistakes? That it's trying to hedge its positions discretely, even in a market which has systematically slaughtered anybody who's tried to do that for the past year?"

Still, Lehman, unlike Bear, has been aggressive in seeking out new capital, raising $6 billion since February. But a new effort suggests that the worst may not be over.

On Monday, Standard & Poor's lowered its ratings on debt from Lehman and other firms, saying that they are expected to announce additional write-downs on their investments. And Merrill Lynch analyst Guy Moszkowski lowered his rating on Lehman stock to "underperform" from "neutral."

Shares of Lehman dropped 8 percent, for a 48 percent decline so far this year.

"This is adding to the perception that there's a need for more write-offs and capital raisings," Greg Bundy, executive chairman of merger advisory firm InterFinancial Ltd. in Sydney and a former head of Merrill's Australian unit told Bloomberg News.

And there are other signs of investors doubting Lehman.

Ben Bittrolff on the Financial Ninja blog notes that the short position on Lehman, or a bet on a plunge in its stock, is now huge and will pay off only if the firm collapses.

"Either some idiots are going to be out a lot of money come June, July, and October," he says. "Or Lehman implodes before then."