Lehman raises cash

Lehman Brothers might be raising $6bn in fresh capital – but it does not need all that money, you understand. It just wants a little more on hand to take advantage of opportunities as they arise.

What else can Lehman say? When your stock is beloved of vocal short-sellers, the top priority is to restore confidence. Having announced its first quarterly loss as a listed investment bank, Lehman is at pains to point out that its balance sheet is fine and trading counterparties are happy to do business with it. Lehman has certainly busied itself on these fronts over the past few months. Once the new capital infusion is taken into account, the bank’s multiple of net assets to tangible equity will drop to less than 10 times. The bank’s nasty mortgage assets have been reduced by about $20bn.

The problem for Lehman is that, on Citigroup’s estimates, it still has about $65bn of tricky mortgage and leveraged loan assets on its balance sheet. In that context, raising $3.2bn more than the preliminary $2.8bn loss taken in the first quarter is certainly prudent. But it seems likely that a large portion of that cushion will be used eventually to absorb further writedowns.

In raising fresh capital and selling off assets, Lehman may have done enough to calm nerves. However, the staggering scale of the quarterly loss and ineffectiveness of Lehman’s own hedges have pummelled the bank’s credibility. Meanwhile, as Lehman attempts to diversify away from the structured finance and leveraged lending activities that boosted profits in recent years, it will face intense competition from its bigger Wall Street brethren. If the fears about the balance sheet have been largely dealt with, questions about the bank’s earnings power remain. Lehman’s latest move will reduce the noise but is unlikely to silence the short-sellers altogether.

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