Lessons from Lehman and Einhorn

I’m still trying to make sense of Lehman’s (LEH) disclosure yesterday that it will post a whopping $2.8 billion loss in the second quarter and raise $6 billion in equity by selling shares at a 20% discount to book value, but one lesson is already readily apparent: the best and brightest analysts aren’t working at the major Wall Street brokerage firms.

Lehman’s projected loss amounts to $5.14 a share, a mind-boggling deficit given that Wall Street analysts were expecting a loss of no more than $1.28 a share. Lehman’s planned fund raising will dilute the holdings of existing common shareholders by 30 percent.

As best I can tell, the loss gives some credence to warnings by hedge fund manager David Einhorn, who repeatedly has charged that Lehman hasn’t adequately marked down some of its assets. While it isn’t entirely clear to me that Lehman plans to write down some of the assets whose value Mr. Einhorn has questioned, the hedge fund manager was indeed correct in predicting a massive earnings train wreck. As Mr. Einhorn so elegantly puts it: “(Lehman) just raised $6 billion of capital that they said they didn’t need to replace losses they said they didn’t have.”

Individual Lehman shareholders should be concerned how Mr. Einhorn – who has a short position on Lehman’s stock – knew with such certainty that the company’s asset values would have to be aggressively written down. Admittedly, it’s quite possible that Mr. Einhorn is just way smarter than the Wall Street analysts who cover Lehman’s stock and is better versed on how to read a balance sheet. But Mr. Einhorn’s public statements indicate that he based his analysis on Lehman’s valuation methods, which possibly suggests we are dealing with basic accounting issues.

Lehman previously maintained that Mr. Einhorn’s criticisms had “no basis in fact.” The merits of that defense are increasingly hard to believe.

Comments

[zenalgorithm:]

The longer houses keep declining, the more desperate the situation at Lehman becomes.

The SEC and FED allow the banks to hide their true asset values because many of banks are currently BK.

Unfortunately, our economy is dependent on lies and deception.

2008 Jun 10 04:24 PM

[whidbey:]

Yes, makes one wonder where the prosecution is going, or there even be one. The accounting misstatements are either negligence or intentional (both actionable), then we have the auditors. Are they back there cowering in the shadows? LEH looks like a fraud from the inception of its reporting. As for the analysts, it is no defense that the hired chorus was silent, or even sang the wrong song. Unless it was intentional. We must learn to care for our own investments if we are escape the bloodbaths.

2008 Jun 10 05:56 PM

[GV_Lenin:]

I hold puts. But in the revolution it was said that lamp posts were made to hang bankers. Put them to use on Wall Street. LEH would make a good starting point.

2008 Jun 11 12:01 AM

[Dan Jacome:]

LEH lost the only thing they had going for it - credibility. Greenlight knew that BSC was not a one-time, but possibly a harbinger of further mass detonation in the fig group. Kudos to Einhorn; Fuld needs more lipstick.

2008 Jun 11 04:55 AM

[ziz:]

The trajectory of the ordure hitting the airconditioning is becoming increasingly predictable - the Bonfire of the Vanities is upon us.

It is difficutlt to decide which is more unpleasant, the smug Einhorn lifting up the stones or the sassy and pretty Erin Callan orchestrating what looks like a leak fest ,to conceal ,rather than reveal ,what is underneath.

The more one examines some of the more recent "investments", SunCal , Archstone Smith .. followed by their subsequent swift loss in asset value , the more one has to question not the current asset values (which are scary enough) but the quality of management that plunged into them so recently.

Without a rapid and convincing tabulated and detailed eplanation of current assets and valuations it is difficult to see that Lehman Brothers will not suffer the fate of BS.

The worry is , that such a fit of transparency might precipitate such an ending ... but a little bit quicker.

2008 Jun 11 07:24 PM