After escaping the rumors in March that some thought would force Lehman Brothers (NYSE: LEH) to meet its demise, the investment bank is back defending itself against those hunting for the next credit-crisis victim.
Hedge-fund manager David Einhorn, whose recent book Fooling Some of the People All of the Time details his battle short-selling Allied Capital (NYSE: ALD), has called Lehman into question in the face of a nearly $700 million net pretax gain on certain assets that helped juice first-quarter results.
Einhorn, who is short Lehman stock, claims the assets include an Indian-based energy company marked up between $400 million and $600 million in the first quarter, according to an article in The Wall Street Journal. He's also called into question the degree to which Lehman has marked down its collateralized debt obligation holdings, since only $200 million was lopped off from $6.5 billion of securities in the first quarter, even though around a quarter of these assets hold what is considered "junk" status.
Lehman shooed Einhorn's criticism away as nothing more than rhetoric designed to scream fire in a crowded theater. "Mr. Einhorn cherry-picks certain specific items from our quarterly filing and takes them out of context … which suits him because of his short position in our stock," stated a Lehman spokeswoman.
Enough, you two
The issue here is clear, and its solution is anything but. Einhorn is short Lehman stock. He has every incentive to induce fear and drive Lehman stock into the gutter. Lehman, still licking its wounds from Bear Stearns' (NYSE: BSC) collapse, has every incentive to value its assets in whatever manner benefits it the most. Whatever the "truth" is in this matter, it's unlikely you'll get it from either of these two.
In Lehman's defense, the amount of money being called into question is hardly an earth-shattering sum. Lehman had more than three-quarters of a trillion dollars of assets at the end of February -- $600 million is a rounding error. Lehman's management team is undeniably uneasy and anxious, but it isn't stupid. Knowing full well the fury that's unleashed when sketchy books are exposed and the fallout that would ensue, Lehman has, by all hopes, gone to great lengths to make its books as accountable as possible.
In Einhorn's defense, short-sellers are probably much more detective-like than an investor searching for hope would be. Bill Ackman -- who called the bond insurers' fall from grace years before Ambac (NYSE: ABK) and MBIA (NYSE: MBI) started heading south -- took heat as a vicious short-seller but was eventually spot-on. James Chanos, who runs a hedge fund partial to shorting, spotted Enron's woes early on and cast a light on what turned out to be one of the largest corporate debacles in history. Although their intentions can't be masked, short-sellers can play an important role in markets by leveling out analysts who often have an incentive to disclose nothing more than a company's rosy spots so they can hold down lucrative clients.
Regardless of who's right in this bout of bickering, Lehman is bound to get bucked around as the market sorts through investment banking's future. If overzealous short-sellers are the worst of its problems, it should be counting its blessings. At least it doesn't have to change its name to JPMorgan Chase.
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