Lehman and the spinmeisters

It was just a week ago that the Wall Street Journal was reporting that Lehman Brothers (LEH:NYSE) was looking to raise between US$3 and US$4 billion of capital. In places as far afield as Korea; a stop not historically on the roadshow schedule for wounded U.S. financial institutions trying to survive.

Despite the precise nature of the source quotes in the story, Reuters didn’t buy it, and drummed up some equally anonymous sources to deny the original story:

NEW YORK (Reuters) – Lehman Brothers Holdings Inc (LEH.N: Quote, Profile , Research) has no need to raise capital and would only do so if the right market opportunity presented itself or if the firm thought it would help investor perceptions, a source familiar with the situation said on Tuesday.

The source said a move to raise capital was only one of “dozens” of options for the bank.

Lehman Brothers spokeswoman Kerrie Cohen declined to comment on a Wall Street Journal report that said Lehman was considering raising billions of dollars in fresh capital.

Earlier today, Lehman’s silence surrounding a new WSJ story serves as a tacit acknowledgement that the WSJ was correct all along. US$5 billion of new capital is on the way, driving Lehman shares down 12.4% in the premarket. Trying to price an equity offering as the shares are careening is like trying to catch a falling knife.

Reuters might have been correct when it reported on the “dozens of options” available to Lehman management; the trouble for shareholders is that there may not have been time to test them all.

There’s something odd about this venture to the equity markets. With the U.S. Fed making overnight loans available to U.S. brokerage firms, I’d thought that the industry was now untouchable. Had Bear Stearns had the luxury, it would still be an independent institution today.

The hedgies will have fun this morning. Shorting Lehman in the hopes that they can cover on the equity offering. Natural longs will be cautious, if the performance of Citibank’s (C:NYSE) April comon share offering is any guide. On April 30th Citi raised another US$4.5 billion at US$25.27. Six weeks later, Citi is trading at $20, barely above the $18 nadir of March.

CIBC (CM:TSX) raised equity at $67 and $65 in January, and the stock is treading water at $65.

Over the past eight months, the majority of North American financial institution capital raises have presented investors with another opportunity to buy stock cheaper in the weeks and months that followed. Like Citi at US$30?, you can buy more from Treasury at US$25. Love it there, and you’ll soon be able to fill your boots at US$20.

The lesson is this: raising capital only keeps the lights on. It doesn’t actually drive share prices higher. Addressing the business challenges that necessitated the equity offering(s) is the only way to do that.

MRM