naked capitalism

I’m updating this contrary to my usual style, with the latest breaking news update at the top, and you can read the earlier byplay below for entertainment, background, and detail on the fundraising. I suspect there are going to be more Lehman updates today, and I think it’s a bit easier for readers to consolidate when possible.

MarketWatch reports that Lehman will post a $2.8 billion loss. Per the earlier reporting cited just below, this will be nearly ten times the expected losses of $300 million. Now how Lehman managed expectations so badly when they were out in the middle of a huge PR blitz is a big open question.

With losses far worse than expectations, the stock ought to fall out of bed,. But ironically, the oft-demonized shorts may do the firm a favor on what will no doubt be a turbulent day. If the price gaps down, some shorts may decide to exit today, and their buying would make the shares perform better than they would otherwise.

The firm also says it is going to raise $6 billion. If the stock does trade down significantly as a result of this nasty earnings surprise, Lehman could find some of their earlier commitments evaporating (some of the suspects discussed in earlier reports below).

This will be a crucial day for Lehman. From MarketWatch:

Lehman Brothers Holdings Inc.on Monday said it’ll raise $6 billion in a stock offering. The investment bank also expects to report a second-quarter loss of $2.8 billion, or $5.14 a share, from a gain of $489 million or 81 cents a share in the year-ago period. Total revenues less interest expense will be $700 million, down from revenue of $5.5 billion in revenue in the year-ago period. Net revenue for the second quarter reflects negative mark to market adjustments and principal trading losses, net of gains on certain debt liabilities, Lehman said

Update 7:40 AM: Per a comment, and a reader e-mail, Charles Gasparino is now reporting that Lehman will not be independent in 6 months. Barry Ritholtz says Lehman is expected to open 10% lower.

Now to the reports from late last night/early AM:

The Wall Street Journal appears to be breaking this story. Although Lehman was on its way to raising more capital before the size of the losses were known, note that the pattern heretofore has been to raise new funds corresponding to or somewhat in excess of the amount of losses announced. The investment bank apparently intend to secure considerably more equity than it will post in losses. The Journal also indicates that the funds will come largely from the US.

The $2 billion loss is more than six times expectations. That alone is telling. Lehman has been out aggressively managing its story and attempting to raise cash, yet did not cover the basics of making sure investors and analysts did not get an earnings surprise. Did they think that candor would get in the way of securing investment commitments? If so, that was a dangerous gamble. A sharp fall in price Monday could impede finalizing any equity sales. As a result, it isn’t yet clear how much dilution current shareholders will suffer (note the Journal reported previously that Lehman was expected to sell common stock since that would go over better with regulators and rating agencies; interestingly, this later story isn’t as definitive that Lehman will be issuing common).

From the Wall Street Journal:

Lehman Brothers Holdings Inc. is close to raising more than $5 billion of fresh capital from an array of investors including the New Jersey Division of Investment, according to a person familiar with the matter.

The move comes as the firm is set to report a second-quarter loss of more than $2 billion, this person said. Until recently, most analysts who follow Lehman have been predicting a loss of about $300 million.

On Sunday afternoon, the firm was still pulling together final details of the capital raising, which could be announced Monday or Tuesday. Additional capital raisings are sure to follow for other banks….

Lehman canvassed the globe in its capital raising but in the end found a group of primarily U.S. investors. Lehman’s stock has tumbled about 50% this year as concerns have mounted over its financials and its exposure to the mortgage market.

So far, the firm has strong commitments from the New Jersey Division of Investment, which manages the state’s $80 billion of pension funds and recently invested in Merrill Lynch & Co., and from C.V. Starr, the investment vehicle of Maurice R. “Hank” Greenberg, former chairman and chief executive officer of American International Group Inc. A significant foreign investment remained a possibility….

So far, Friday’s market turmoil hasn’t deterred the outside investors, but Lehman may decide to see if markets stabilize on Monday before announcing its plans. A big capital increase from Lehman could help calm nervous investors and stabilize the broader market. The capital raising would come primarily through common shares, the first such issue since Lehman went public in 1994.

So far this year, Lehman has raised almost $6 billion, but that was mostly in the form of preferred shares, a stock-bond hybrid that doesn’t dilute the ownership of common shareholders. While a common-share issue would hurt Lehman’s already-suffering shareholders by diluting their ownership stake, rating companies and regulators are likely to look favorably toward a greater capital cushion.

Lehman’s larger-than-expected second-quarter losses stem partly from asset write-downs and hedges used to offset losses in real estate and other securities, according to people familiar with the matter. The firm bet that indexes tracking markets such as real-estate securities and leveraged loans would fall. If that happened, it would book profits that would make up some of its losses from holding these securities and loans.

Note that according to the transcript of the first quarter earnings conference call (I have the pdf but no web version), Lehman was hedging Alt-As with mortgage servicing rights. If you call that a hedge, I have a bridge I’d like to sell you.

Update 6/9. 12:00 AM: An alert reader pointed to a story in the Financial Times that added some details to the Journal coverage. Lehman may raise as much as $6 billion, and is scrambling to move its earnings announcement up to Monday or Tuesday (versus the scheduled date of June 16) and announce a successful fundraising at the same time. Note that this sense of urgency (one might say desperation) is consistent with our observation earlier that the investment bank needed to stitch up a deal quickly.

From the Financial Times:

Lehman Brothers is working on plans to announce early next week that it is raising $5bn-$6bn in fresh capital as the bank discloses a large second quarter loss, people briefed on the matter said…

These people said the capital infusion may include one or more US institutional investors, such as big pension funds, and one or more foreign banks, possibly from South Korea or Singapore.

The people briefed on that matter noted that Lehman is continuing to discuss its options internally and with potential investors and that any plans to announce a capital infusion could fall apart.

Names mentioned by market sources as possible investors in Lehman include DBS, the Singaporean bank, Korea Development Bank and Woori Financial Group of Korea. All have declined comment or could not be reached.

In the US, market sources have mentioned Calpers, the big California public employee pension fund, as well as the New Jersey Division of Investment.

CV Starr, the investment vehicle of Hank Greenberg, former chairman and chief executive officer of AIG, has also been mentioned…..

The capital raising is expected to come as Lehman, led by chief executive Dick Fuld, discloses a second quarter loss, the first in its history as a public company, driven by markdowns on mortgage related assets and a decline of $600m to $700m on certain hedging positions….

However, one person briefed on Lehman’s plans said the bank wanted to announce the capital raising as soon as possible to bolster investor confidence in its finances and wrong-foot short sellers.

I see. Lehman doesn’t really need the money. All this effort is being made for cosmetic reasons and to screw the shorts.

Second Update, 6/9/08, 12:40 AM: Reader Dwight pointed us to a CNN story dated after the FT story, saying that the Korea Development Bank and Woori Financial have no intention of investing in Lehman. It isn’t usual practice to announce that one has declined an investment opportunity. It appears from the wording of the story that they might have contacted the Wall Street Journal news services to correct having been incorrectly listed as possible funding sources.