Wednesday, June 4, 2008

Lehman's Lexicon

At least we know what the word "counterproductive" means.

Erin Callan, Lehman's saucy CFO, said a couple weeks back that some of their hedges were "counterproductive."

Last week at a conference hosted by UBS analyst Glenn Schorr, Lehman Brothers Chief Financial Officer Erin Callan said some of the firm’s hedges have become “counter productive” or are actually losing money.

This is a far cry from a few months ago, when, she says, the firm’s hedges were about 70% efficient, meaning that for $100 it lost on one side, it would recover $70 with the hedge.

In today's FT, we find out the "hedge" losses are $500-$700 million:

Lehman Brothers lost $500m-$700m on certain hedging positions in the second quarter, contributing to what is expected to be a larger-than-anticipated loss that may lead the bank to raise more capital by selling a stake to an outside investor.

So now we have the definition of "counterproductive." It's a billion dollar plus loss pre-tax.

Now Erin previously said that their hedges were 70% efficient. I won't even try to do that math!

Dick Fuld, said Lehman didn't need to raise capital, but wanted to keep it's options open and Lehman, actually bought back some stock yesterday. Maybe they learned from AIG's playbook. Report a larger loss but increase the dividend.

Then raise the capital.

Now the WSJ says that Lehman is looking for overseas capital.

The Wall Street firm has managed to raise capital from a rich base of existing U.S. shareholders, but this week reached out to overseas investors, including at least one in South Korea.

It just means that Lehman has already burned through the last $4 billion that it had previously raised.

But we'll get just half of that story. Because unmarked down assets will remain in Level III land, and that story won't come out, until after Lehman raises more capital "that they don't need."

Thank goodness for the Fed's alphabet soup!

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