Wednesday, June 11, 2008

A Sinking Feeling About Lehman

How low can Lehman Brothers go?

The brokerage's shares fell for the fourth day in a row Wednesday, in the wake of Monday's announcement of a quarterly loss of $2.8 billion and plans to raise $6 billion of capital. Lehman shares slid 13.6%, or $3.75, to close at $23.75. It has fallen 26.5% so far this week. The real decay in the stock began when Merrill lowered its rating on the stock. The week before, it had taken a neutral rating to a buy, and has now reversed itself. Source

"They diluted the shareholders that much, and now they may need more capital? There's a real crisis of confidence in management here," Bill Smith, chief executive officer of Smith Asset Management, told Reuters. Smith Asset Management sold its Lehman shares at the open Wednesday morning.

Its $6 billion fundraising plan comes after numerous rumors that the company was strapped for cash, which had been met by denials. (See: "Lehman Doesn't Need The Money")

Wednesday also brought a slew of analyst commentary predicting smaller profits for years due to the dilution from its plan to raise $6 billion in new capital. Wachovia's Douglas Sipkin said the plan dilutes profits by more than 20%, and its effects will be felt for a long time. He was also critical of the company's timing, arguing that it could have raised equity at higher prices had it offered the new shares in April. Merrill Lynch also downgraded the company after giving it a "buy" rating on June 4.

Options volatility in Lehman shot through the roof, with two times as many bets against the stock as bets that it will gain. There was unusual activity in July put options. More than 43,000 contracts traded hands at a $15 strike price. Before today, this particular contract had volume in the 9,000 range. Rebecca Engmann Darst, an analyst at Interactive Brokers, said the activity is split between buyers of puts and sellers, which suggests some of the volume was short-sellers hedging their positions.

See also Fed Discount Window Mixed Blessing for Lehman