There is no longer a shred of doubt that Lehman Brothers is headed down toward single digits, possibly all the way to the the pink sheets. The kiss of death came yesterday when the stock gaped up at the open and closed up by $3.12 on the news that BlackRock would buy it:
The usual nonsensical rumor — that Buffett was going to be the buyer — has become so discredited that a new patsy needed to be named. Blackrock did participate in the now upside secondary, so perhaps they want some more pain.
Whatever possible kickback to BlackRock manager Hank Greenberg, the deal itself can be no better for the participants than the ones of the shotgun wedding of Bank of America to CountryWide. The certainty on Wall Street is rumors are lies and we will eventually see who’s purpose this rumor serves.
In April, CEO Richard Fuld lied to investors at the company’s annual shareholder meeting, saying that the worst of the credit crisis is behind Wall Street although the environment “will remain challenging.” Now he obviously hoped investors would mistakenly conclude that the worst for Lehman Brothers was behind them, aware that the worst was yet to come. We say obviously because the plans announced on June 9 to raise $6B in new cash must have been considered by at least April 15.
With the SEC so deep in their pocket you have to pump daylight to them. Lehman explained the decimation of share price in the time honored Street tradition of blaming it on short sellers:
To begin with, you have no business buying stock if you need to hit the capital markets - for any reason. The SEC was willing to look into short sellers conspiring to drive Lehman’s stock price down - well I insist they look into Lehman for conspiring to drive stock prices up! They stated that they only bought small amounts, but since they failed to mention what those amounts were, it is called into question.
But the company was buying stock as fast as they were selling it, which brings us to the four-year-long lie the company has been telling:
Its policy on share buybacks was to avoid the dilution caused by grants of restricted shares and options issued to employees, and that meant it bought back about as many shares as it issued.
It succeeded. The number of shares outstanding at the end of the first quarter was virtually the same as it was at the end of the 2004 fiscal year, after adjusting for a stock split. But with the stock rising for much of that time, those purchases cost a lot of money. In the 13 quarters from the end of that year through this year’s first quarter — that is, before the new $2.8 billion loss — Lehman reported net income of $11.9 billion, and spent $11.8 billion on share repurchases.
We have seen this movie before, when Warren Buffet was going to buy Bear Stearns and Countrywide, and we know how it ends. Both companies claimed fiscal health, boasted liquidity, and with smoke and mirror accounting said there was nothing to worry about. So what do you do with an insolvent company running for its life on fuzzy accounting and an ad blitz based on lies? You stay short.
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