7:00 AM Update: Lehman to Post $2.8 Billion Loss, To Raise $6 Billion (And Later Updates….)

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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.

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  1. Anonymous

    What I want to know is how Gasbag still has a job. He is by far the worst business “anchor” on cable TV.

    CNBC is to business news what KFC is to chicken – avoid at all costs.

  2. Anonymous

    You know damn well that Lehman is having dinner with Bernanke and friends tonight and they will cut a deal before breakfast! Anything to bail out a mis-managed over-leveraged dead bank! Print more money and take more bets ASAP!

  3. Been there


    Been following your blog for only a few months. Been reading the WSJ for 25 years. I rely more on your opinions and reporting on serious issues than on theirs. Don’t worry about what certain individuals might think about the quality of your work. The accuracy, integrity and especially the insights provided by what you do is self evident. The world needs people like you. This article is just another reinforcement of that fact. I always look forward to your next post. Please keep up the great work!!!

  4. tomd

    So, the motivation behind that arrogant post left by the Lehman pig Friday becomes clear: he/she knew the number was going to be
    $2B instead of then-rumored $1B. And BSD’s think offense is the best defense.

  5. Anonymous

    dilution is the solution for pollution. Works for banks too. Who keeps handing these clowns more.

  6. tom a taxpayer

    How will the good citizens of New Jersey take this news:
    “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.,..” (WSJ article)

    Will the good citizens of New Jersey march on Trenton and demand the firing of the New Jersey Division of Investment for a reckless pension fund investment in Lehman?

    It seems the New Jersey Division of Investment is already under scrutiny. This message is on their website frontpage:
    “In response to recent inquiries, we are pleased to report that the State of New Jersey Cash Management Fund does not have any exposure to asset-backed commercial paper, and specifically no investment in securities backed by sub-prime mortgages.”

    The New Jersey Division of Investment’s proposed investment in Lehman gives the lie to their website assurance about avoiding exposure to risky investment.

  7. Anonymous

    Sy Krass said…

    Doesn’t another bail out (if it happens) increase the likelihood of an overall meltdown? Is it even possible? The final price for the bonds/derivatives/liabilities of Bear Stearns and Countrywide in their deals havent even been finalized, and when they are won’t they be priced 50 cents on the dollar or less, or just outright be defaulted on? Won’t this be a signal to price all this worthless paper similarly?

  8. Victor

    Yves, the thing that is most amazing, and I hope you cover this more, is how they are raising capital. They sell equity at below market prices, which allows the preferred buyers to immediately short on the open market and make a tidy profit. Essentially the group being screwed is the current shareholders who are being diluted to directly provide capital to the company. This can only go on as long as current shareholders are willing to take repeated dilution. Once shareholders refuse this treatment, the share price will collapse.

  9. Anonymous

    You have to give Lehman credit for quite a bit of political savvy in getting a public employees pension plan to invest. Not likely the Fed will be too eager to let that plan lose money.

  10. eh

    Whether or not LEH or any other investment bank gets more money no doubt depends a lot on the terms of the deal:

    Royal Bank of Scotland confirmed on Monday that 95.11 per cent of the shares offered in its £12bn rights issue had been taken up by investors. The “rump” of nearly 300m shares left with the underwriters – Goldman Sachs, Merrill Lynch and UBS – was to be placed during the day…The success of the issue – the largest seen in European markets – followed an upturn in the bank’s share price last week, which at the start of the week had fallen to 220p, dangerously close to the 200p price for the shares,…

    It’s really amazing how again and again they work up the chutzpah to put out positive spin on such obvious desperation.

  11. eh

    They sell equity at below market prices, which allows the preferred buyers to immediately short on the open market and make a tidy profit.

    Exactly — desperation. Many outfits with money would be interested in that kind of deal.

  12. Erin

    Good God! Chuck(gasp) now predicting a LEH “fade to black” in 6 months! Journalism at its finest.

  13. FAZ

    Why does the CFO still have a job – she clearly has no idea what the right level of equity for her balance sheet is – I’m pretty sure they were telling people this was a one shot only deal last time they raised money. Maybe she can explain what the ideal leverage for their book is and how she got to that number.

  14. S


    Interesting that the release has no balance sheet and a small table of marks. Net leverage down by 60B which means that the $100B plus reducetion includes match book on not at trisk asssets. That would be one more distortion from gasbasgs distortions on national television.

  15. Yves Smith


    Thanks, and the press release also says 35% reduction in acquisition finance exposures. Since most players have been providing financial support to those so-called sales, I’d assume Lehman did too. Wonder if the 10-Q will speak clearly to that point. .

  16. Been there

    “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.”

    It will be interesting what effect this will have(or may already have had) on the Civil Proceedings being conducted against Mr Greenberg by the SEC.

  17. Anonymous

    Dorian Grayesque, in every sense of the definition….

    They probably wont make it through the weekend.


  18. Peripheral Visionary

    Bloomberg reports $120B in assets sold, but who are they selling to, and are the assets being sold “as is” or are there put options attached that could result in more losses for Lehman?

  19. S

    these guys again took $400M in gains on their debt worsening.

    More importantly per CFO: “We have no intention of lowering our leverage ratios from this level”

    On ROE and lower leverage, LEH sees higher margins and activity levels being favorable to this the firm

    This really is sureal…bizzaroworld

  20. Anonymous

    S– there you go– no lowering of leverage because it’s level three… what part of that concept don’t you get?

  21. donna

    So.. people will invest in Lehman so Lehman can invest in… what, exactly?

    Or have we not yet figured out that these financial geniuses aren’t?

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