Wednesday, June 4, 2008

Einhorn v. Callan In re: Lehman

For eight months now, Mr. Einhorn, a rabble-rousing hedge fund manager, has pilloried the venerable Lehman Brothers in an effort to drive down the bank’s stock price, which he is betting against.

Lehman Brothers is not amused. In recent weeks, the bank’s chief financial officer, Erin Callan, has tried privately to rebut Mr. Einhorn to nervous investors, who have feared for Lehman’s health ever since Bear Stearns succumbed to a panic. But despite Ms. Callan’s efforts, Lehman’s stock keeps falling: It tumbled 9.5 percent more on Tuesday, in a deluge of selling, bringing its loss for the last 12 months to 59 percent.

The battle over Lehman has captivated Wall Street and left the bank struggling over what to do next. The bank, which is expected to post a quarterly loss of roughly $1 billion in a few weeks, may also raise capital to shore up investor confidence. The bank has sold more than $100 billion in assets in recent months to shore up its finances, according to a person close to the company. That person said new capital would most likely come from a source other than the public markets.

It is impossible to quantify Mr. Einhorn’s influence on Lehman’s stock price. But hours before his speech two weeks ago, trading volume exploded for Lehman stock puts, which are options to sell the stock and profit if its falls. That day, more than 200,000 put contracts against Lehman were sold, up 49 percent from recent typical Lehman put trading.

Lehman, like its counterparts, is racing to use less leverage. The bank had a gross leverage ratio of 31.7:1 at the end of the first quarter, meaning it had borrowed $31.70 for each dollar of equity. Lehman has whittled that ratio down to 25:1 through its more than $100 billion in asset sales, said the person close to the company who was given anonymity because he was discussing a pending financial filing. A small amount of the sales were to two hedge funds set up by former Lehman executives.