Toomre Capital Markets LLC

On the morning of Monday June 9^th 2008, Lehman Brothers pre-announced their second quarter earnings report and gave limited details on their capital raise efforts. [A link to the press release can be found here.] The numbers are larger than what Toomre Capital Markets LLC ("TCM") wrote about last night in the post Lehman Brothers Said to Lose $2 Billion Plus in Second Quarter. Lehman Brothers now expects to lose $2.8 billion for the period ended May 31^st 2008 as well as raising close to $6 billion through a combined common stock and preferred offering.

Partly as a result of this announcement, Moody's Investors Service has put the ratings of Lehman Brothers under review for a likely downgrade. Lehman Brothers will be conducting a 10 AM conference call to discuss further this press release. From the press release, it appears that the fixed-income division had a net loss of approximately $5 billion, which is much larger than the losses that Lehman Brothers has announced in prior quarters.

Lehman Brothers in the past months has pledged to increase its transparency regarding its financial transparency. It certainly will be quite interesting to learn more about where these losses came from. Toomre Capital Markets LLC will post more about this company later in the day as further information becomes available.

Late on Sunday June 8^th 2008, The Wall Street Journal is reporting Lehman Set To Raise $5 Billion Amid Losses. Supposedly the equity offering will be placed primarily with United States institutional investors, including the State of New Jersey Division of Investment. What is most interesting about the article though is that Lehman Brothers' second quarter loss is expected to exceed $2 billion, much more than the market consensus of a $300 million. Such a number, if true, makes it highly likely that the Lehman Brothers common stock will likely open down again on Monday morning. Such a decline tied both to a bigger than expected quarterly loss as well as the dilution from a secondary stock offering will make it much more difficult to price a big common stock offering.

Toomre Capital Markets LLC ("TCM") hopes that Lehman Brothers can succeed in placing the $5 billion in equity. While it will be highly dilutive to existing shareholders, such a capital raise should ensure that Lehman Brothers will be able to continue as an on-going entity, particularly in the fixed-income markets where their credit rating is critically important both for funding needs and the derivatives businesses. One might remember that a significant portion of the common equity currently is owned by the employees of Lehman Brothers who have seen the value of their holdings decline by close to fifty percent since the start of the year. Those employees might well be asking how Lehman Brothers allowed itself to get so off-sides to own some $80 billion odd in mortgages securities at the start of this credit crunch.

Toomre Capital Markets LLC ("TCM") is a fan of New York Federal Reserve Bank President Timothy Geithner (as demonstrated by the post Timothy Geithner: "Illigitimum non Carborundum"). On Sunday June 8^th 2008, Mr. Geithner penned a commentary piece in The Financial Times that calls for global banks and investment banks whose health is crucial to the global financial system should operate under a unified regulatory framework with "appropriate requirements for capital and liquidity". Entitled We can reduce risk in the financial system, this article is must reading for those struggling with the question of what will be the value of investment banking franchises in the post-Bear Stearns environment.

CNBC Television personality Jim Cramer penned an article on Thursday, June 5^th 2008 entitled Why Own Lehman? In that article he said that No, he did not think that Lehman Brothers was going under. "It's got a great franchise with a good cash position, reduced leverage, much better management than Bear [Stearns] and a buyback that's kicking in that wouldn't if things were as bad as the bears make it out to be." The questioner then apparently asked if Cramer would buy the Lehman Brothers stock. Cramer said, "Why the heck would I do that? To catch a 2- or 3-point rally? There is no earnings power at Lehman."

Toomre Capital Markets LLC ("TCM") normally approaches such pronouncements from television pundits with a healthy dose of skepticism. However in this case, Jim Cramer is right on. The article continues:

During the first two trading days of June 2008, the common shares of Lehman Brothers have declined by 8.10% and 9.52% respectively. In pre-trading on Wednesday, June 3^rd 2008, those shares are off another 2.50%. Clearly, the short attack on Lehman Brothers and concerns about the credit crunch are back!!

As Toomre Capital Markets LLC ("TCM") has written previously in the posts Value of the Investment Banking Franchises?? And Lehman Brothers Weighs Raising Equity Capital, TCM has been questioning what the on-going value of investment banking franchises will be in the post-credit crunch operating environment. That questioning assumes that one is able to work from "good" balance sheet data, which in the case of Lehman Brothers is being sharply called into question.

On Wednesday June 4^th 2008, the Heard on the Street column in The Wall Street Journal is entitled Decision Time for Lehman. This article is well worth in reading in its entirety