Over the past 5 trading days, shares of Lehman Brothers (LEH: 8.06, +0.27 (+3.47%)) have been beaten down over 51% due to capital raising issues. Shares are now down to their lowest point in the past 10 years, and had their biggest drop ever yesterday in the firm’s 158 year history. Many investors have become wary of Lehman over the past 3 months and their ability to successfully continue their operations. In order for them to operate smoothly, they will need to raise a lot of capital to offset the sharp decline in some of their commercial and real estate assets. Compared to other financial firms, Lehman has taken too long to raise capital to absorb these expected losses. Investors are now scared to invest more into Lehman after seeing the value of their other additional investments in Lehman and other banks fall dramatically in value.Spreads to raise debt in the capital markets have also become too expensive with some of their spreads over 800 bps to treasuries.
Lehman’s Previewed Earnings
Lehman is on track to report what will be the firm’s largest loss since their IPO in 1994. Internal projections are in the range of $4 billion, or $5.92 a share, for the quarter on just under $8 billion in write-downs. Contributing to the write-downs include gross write-downs of $5.3 billion on residential mortgages and $1.7 billion in their commercial real estate portfolio. The firm is also projecting negative net revenue of about $2.9 billion. According to Thomson Reuters, analysts were expecting a loss of $3.35 a share on revenue of $286 million.
Their investment management division, which they are trying to sell, is expected to post $600 million in net revenues. This will be a 25% decline from the past quarter’s results. Their capital markets division will post negative net revenues of over $4 billion and projections for investment banking revenues will be down 33% from the last quarter.
In Lehman’s conference call the CEO, Richard Fuld, said of Lehman’s plans, “The strategic initiatives we have announced today reflect our determination to fundamentally reposition Lehman Brothers by dramatically reducing balance sheet risk, reinforcing our focus on our client-facing businesses and returning the firm to profitability.” Returning the firm to profitability after delivering their businesses will be impossible. Lehman saw record earnings and saw their share price soar between 2004 and 2007 as they moved their business plan from a bond powerhouse to taking on more risk with commercial and real-estate assets.
