Thursday, May 22, 2008

Lehman Raises 'Confidence' Money - And Promptly Spends It All

Lehman Brothers (LEH) raised $4 billion dollars to allegedly "prove" to the market that it was liquid and had confident investors and trading partners. I didn't believe that to be the real reason then and I really don't believe it now.

The news is out that the Fed has probably hit a floor in dropping rates, with inflation and unemployment concerns rising. As I stated in my earlier articles on the banking industry , this spells trouble for banks relying on expanding net interest margins to bail them out of their insolvency situations. I knew this was bound to happen, for effective (headline) inflation is out of control and we are bordering negative rates as it is. So as a result, those banks facing the potential of insolvency are now that much worse off. This is a big deal for the investment and commercial banks - a very big deal. My next few posts will concentrate on this, and I will wind them up with a few more of my personal shorts in the sector. Now, back to Lehman...

Lehman raised $4 billion dollars about a month ago. That is the credit. Now let's add up the debits:

* They had to buy out two investment funds that they ran, engulfed in losses, for $1.8 billion.
* They are rumored to have losses on their portfolio and their hedges, to the tune of about $1.5 billion to $2 billion .
* They are firing about 5% of their workforce which will demand severance packages, let's say conservatively about $100 million.
* They issued a smoke and mirrors earnings report last quarter which hid the fact that they took a cash loss. This means that the IB broken business model is probably taking effect already at this institution.

Now, if we have 4 in inflows, subtract 1.8, less 1.7, less .1, we get $3.6 billion in outflow. I am assuming Lehman didn't net the full $4 billion that was stated as the gross offering amount. So, roundabout, net-net, Lehman is pretty much back where they started from when the market was driving their stock down to $20.

I am obviously not the only one who has this funny calculator since Lehman dropped 6.5% yesterday.