You're Making Me Dizzy, Lehman Brothers

The latest saga of the Lehman Brothers (NYSE: LEH  ) snafu really heated up when hedge fund manager David Einhorn called out its balance sheet woes. Lehman's response didn't go much further than suggesting Einhorn must be wrong simply because he'll benefit if he's right.

For now, it's not hard to see who's winning the argument. On Monday, Lehman announced it is raising an additional $6 billion in capital -- $4 billion from common stock, $2 billion from convertible preferred stock -- and released expected second-quarter earnings that could make a Viking blush.

For the second quarter, Lehman swung to a net loss of $2.8 billion, or $5.14 per diluted share, down from a profit of $1.3 billion, $2.21 per diluted share logged in the same period last year. Revenue is expected to come in at negative $700 million, down from positive $5.5 billion in the second quarter last year.

Taking steps to pare back the credit party of the last several years, Lehman grew its liquidity pool to an estimated $45 billion, decreased gross assets by around $130 billion, reduced leverage from nearly 32 times to less than 25 times, and tapered exposure to several real estate-associated assets by 15%-20%.

Sure, the results were about as bad as anyone expected, but nearly every big bank has been zapped in recent months. UBS (NYSE: UBS  ) purged its guts out, Citigroup (NYSE: C  ) can't stop raising capital, and Merrill Lynch (NYSE: MER  ) has already axed $30 billion off its books. Probably for good reason, pessimism has been the theme lately. Why is Lehman being so gosh-darn stubborn?

In the "perception beats reality" world that's gripping markets, it doesn't have much of a choice. It's quite a conundrum for Lehman: If its behavior followed that of its peers -- admitting gross overindulgence, taking massive write-offs, and not being shy about needing capital -- it might as well change its name to Bear Stearns. But the act of being a bit sneaky -- dropping comments like "the worst ... is behind us" and shooing away criticism, draws suspicion -- the same sort of suspicion that took Bear Stearns down.

None of that means Lehman is doomed, but it's hardly out of the woods. If its troubles are the product of nothing more than naysayers like Einhorn, the brighter days that should lie around the corner will shore things up. If Einhorn's right, selling the company before things get worse might not be a bad option. Either way, the unanswered questions keep the spotlight on Lehman, exactly where it doesn't want to be.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. He appreciates your questions, comments, and complaints. The Fool has a disclosure policy.

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