Lehman Brothers (LEH) On The Brink

It is truly sad to watch Lehman Brothers (NYSE: LEH) struggle to stay alive. Lehman has a long history and was originally founded in 1850. Over the years, it went through many gyrations from the Shearson Lehman Brother days to merging with American Express (NYSE: AXP) and then spinning it off.

Well, now is Lehman on the brink or are there better days to come for the company?

If you listen to Dick Fuld, you'd be led to believe better days are ahead, but Lehman's stock price is saying something different. Lehman held a conference call earlier in the week, where Lehman's CEO, Dick Fuld, said his latest strategy "will accomplish a significant de-risking of our balance sheet," in part by putting risky assets into a new company.

I don't think investors are believing Fuld's mandate to rid Lehman of risk. Fuld has been at the CEO helm since '93 and has taken Lehman through tough terrain before, but this time he is facing a much tougher environment.

I thought it would be interesting to see what Lehman execs have been saying over past year, therefore below are some of the more interesting quotes. I found these quotes by reading conference call transcripts and an article in the International Herald Tribune. After reading some of their statements, I do not believe investors should be too reassured with Lehman's guidance and strategy to spin off bad real estate assets.

"Our liquidity position is stronger than ever. Looking at past credit corrections, the capital markets have proven to be resilient, with previous dislocations lasting three months, on average" Lehman's chief financial officer, Christopher O'Meara (pre Erin Callan), said that approximately a year ago.

Lehman shares were trading above $60 back then and in the ensuing six months, Lehman spent $1.1 billion buying back shares, at an average price of about $60 per share. Many didn't understand why Lehman was spending its cash on shares rather than shoring up the balance sheet, but investors still held onto the stock.

By December, Lehman was trading down around $56 and Erin Callan, then the new chief financial officer, was proud. "We have come through the current downturn very well positioned on a competitive basis." Callan continued, "We believe we can capitalize on this opportunity for 2008. The consistency of Lehman's senior management team, the strength of our brand and reputation are reassuring to our clients."

Lastly, and maybe most importantly, Callan said, "conservatively, our view right now is that the asset prices in the fixed-income market will begin to stabilize over the next six months, which will serve as an inflection point for improvement in fixed-income later in the 2008 calendar year."

Callan statement obviously proved untrue as asset prices continued to fall. That 'hope' mentality has really proved to hurt Lehman Brothers.

Back To Buybacks
Lehman believed in its rosy outlook so much that in January it increased its buyback, spending $500 million in one month.

Then only months later, Lehman came to the realization that it may need capital and Lehman raised $4 billion through a preferred offering. Two months later, in June, LEH raised another $2 billion in preferred stock and $4 billion in a common stock offering at $28 per share.

After the offering, Erin Callan said that the monies raised will not be used to decrease leverage, rather to take advantage of future market opportunities.

Please read Callan's quote below.
"And over all, we stand extremely well-capitalized to take advantage of these new opportunities. From a risk management perspective, we continued to operate in our disciplined manner we're known for."

The market didn't like the multiple offerings and the stock sold off to the mid-$20s. Fuld, named a new CFO and tried to reassure investors and said, "Our capital and liquidity positions have never been stronger."

To sum up, if the above quotes from the Lehman executives were accurate, then it is surprising that Lehman is now being forced to repair its balance sheet. Callan noted above, Lehman operates in a disciplined manner, but the results from this week obviously show there was a true lack of discipline.

Would I step up and buy Lehman shares under $4? In my opinion, the answer is like a bad Vegas bet. First, it is difficult to believe in optimism expressed from Lehman's executives this week and I don't think the fed will be here this time to assist in a bailout.

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