Lehman Brothers: The Spinmeisters Were Right

It was just a week ago that the Wall Street Journal was reporting that Lehman Brothers (LEH) was looking to raise between $3 and $4 billion of capital. In places as far afield as Korea; a stop not historically on the roadshow schedule for wounded U.S. financial institutions trying to survive.

Despite the precise nature of the source quotes in the story, Reuters didn’t buy it, and drummed up some equally anonymous sources to deny the original story:

 

NEW YORK (Reuters) - Lehman Brothers Holdings Inc has no need to raise capital and would only do so if the right market opportunity presented itself or if the firm thought it would help investor perceptions, a source familiar with the situation said on Tuesday.

The source said a move to raise capital was only one of “dozens” of options for the bank.

Lehman Brothers spokeswoman Kerrie Cohen declined to comment on a Wall Street Journal report that said Lehman was considering raising billions of dollars in fresh capital.

 

On Monday, Lehman’s silence surrounding a new WSJ story served as a tacit acknowledgement that the WSJ was correct all along. $5 billion of new capital is on the way, and it drove Lehman shares down 12.4% in the premarket that day. Trying to price an equity offering as the shares are careening is like trying to catch a falling knife.

Reuters might have been correct when it reported on the “dozens of options” available to Lehman management; the trouble for shareholders is that there may not have been time to test them all.

There’s something odd about this venture to the equity markets. With the U.S. Fed making overnight loans available to U.S. brokerage firms, I’d thought that the industry was now untouchable. Had Bear Stearns (BSC) had the luxury, it would still be an independent institution today.

The hedgies should have had some fun on Monday morning in shorting Lehman in the hopes that they could cover on the equity offering. Natural longs will be cautious, if the performance of Citibank’s (C) April common share offering is any guide. On April 30, Citi raised another $4.5 billion at $25.27. Six weeks later, Citi is trading at C$20, barely above the C$18 nadir of March.

CIBC (CM) raised equity at C$67 and C$65 in January, and the stock is treading water at C$65.

Over the past eight months, the majority of North American financial institution capital raises have presented investors with another opportunity to buy stock cheaper in the weeks and months that followed. Like Citi at $30? well, you can buy more from Treasury at $25. Love it there, and you’ll soon be able to fill your boots at $20.

The lesson is this: raising capital only keeps the lights on. It doesn’t actually drive share prices higher. Addressing the business challenges that necessitated the equity offering(s) is the only way to do that.

Comments

[Gerry Sullivan:]

You could have added the Wachovia (WB) offering in April at $25. For some other financials you can throw in AIG last month at $38 and Ambac (ABK) at $6.70, now under $2.

Even State Street (STT) couldn't hold the
$70 price where additional shares were sold last week.

2008 Jun 11 07:30 AM

[dkp:]

Mr Fuld's strong desire to remain indepndent is pulling its price down,as well as other financials around the world.If he does not act fast enough, Lehman may go the same way as Bear.

2008 Jun 11 09:35 AM

[venividivici:]

No sensible organisation or investor would put their money in these totally discredited financial companies and yet they keep on finding apparently willing suckers. Recent history shows it is a black hole. What is the answer? Are these investors just trying to shore up existing positions or save the whole financial system from going down the gurgler.

2008 Jun 11 11:35 AM

[notsosmart:]

dont believe what you read or hear.everybody has an agenda.even the rags that once had a good reputation are now pretty much gone.its not a question of good business but survival at any cost.so do anything,say anything in order to survive & to hell with the investor.

2008 Jun 12 09:12 AM

[SleepyLagoon:]

Spinmeisters distort reality (lie). If the reality was that Lehman sought desperately to raise new capital, then the spin was that Lehman had sufficient capital and was not desperate to raise more. Thus the title of this article is bassackwards.

2008 Jun 13 08:44 AM