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Lehman Falls Further... Shatters Support.

Written By Brian Hicks

Posted June 9, 2008

In the days following our note that Lehman Brothers broke $30 support, Merrill Lynch upgraded them to a Buy and maintained a $37 price target.  Merrill believed Lehman’s sell off was overdone, noted that concerns of a “Bear-like” event at Lehman were unfounded, and said that a capital raise was already priced into the stock. 

Unfortunately, the market sheep followed, only to be led off the cliff. 

Lehman lost $2.87 billion, or $5.14 a share, as compared to a year earlier profit of $1.26 billion, or $2.21 a share.  The Street was only looking for a 22-cent per share loss.  Revenue swung to a negative $668 million from $5.51 billion.

Worse, Moody’s just cut its outlook on Lehman to negative from stable shortly after the bank’s plans to raise $6 billion through the sale of common and preferred stocks, diluting common shares by 26%.

And if the sheep were smart, they’d get out now.

According to Fortune, “While [CFO] Callan characterized Lehman’s writedowns of residential real estate-related holdings as “very large,” she declined to answer a question about how big the writedowns are relative to the original portfolio…”

She also failed to answer questions on exposure to Alt-A mortgages, the market’s next ticking time bomb.

Alt-A loans were given to borrowers with credit scores of between 620 and 700, and included the option of interest-only loans, option ARMs, and no documentation loans that required little if any documentation for loan approval. Ninety percent of those that got an Option ARM in 2006 provided little or no documentation.

Ninety percent!

And it’s estimated that only 60% of Option ARM borrowers make only minimum monthly payments. Others estimate that up to 80%.  Say a borrower makes minimum payments on a $600,000 loan. That loan could easily be a $750,000 loan within two years.

And we’re supposed to be shocked when this problem ends in the second credit crisis?

Lehman should fall further here.  LEH now is down another $3.70 today.