May 22, 2008 / 5:41 PM / 10 years ago

Lehman should raise more capital: Einhorn

NEW YORK (Reuters) - Lehman Brothers Holdings Inc LEH.N has not written down bad assets enough, and should raise large amounts of capital to support its assets, short-seller David Einhorn told investors.

The remarks were the latest volley by the president of Greenlight Capital Inc, which manages more than $6 million in assets, against the fourth-largest U.S. investment bank. Greenlight has sold Lehman’s shares short, a position that profits if the bank’s shares drop.

Lehman has said in the past it was cooperating with regulators looking into whether short-sellers were spreading market rumors.

A spokesman for Lehman declined on Thursday to comment on Einhorn’s remarks at the Ira W. Sohn Investment Research conference on Wednesday.

Einhorn said Lehman Brothers only wrote down a $6.5 billion collateralized debt obligation portfolio by about $200 million in the first quarter.

That small write-down is surprising given that Lehman said in a footnote to its quarterly filing with regulators that about 25 percent of the CDOs were junk rated, Einhorn said. The CDO portfolio in question does not have exposure to subprime mortgage loans, but does have exposure to small business loans, consumer loans, and other assets.

Einhorn said that Lehman Chief Financial Officer Erin Callan, when asked about the magnitude of this write-down, did not explain the first-quarter write-down. But he said Lehman would expect to record further write-downs in the second quarter on the assets.

Einhorn has made bearish comments on Lehman before: in December, he told Reuters the bank was not sufficiently writing down “level 3 assets,” or assets that trade infrequently.

In April, Einhorn said Lehman was deferring losses, and that the company would need to reduce borrowings, shed assets or raise capital. That was before Lehman filed its quarterly results with regulators.

“Now I believe the need (for capital) is much bigger,” Einhorn said.

Lehman shares fell $1.18, or almost 3 percent, to $38.38 on the New York Stock Exchange early Thursday afternoon.


Lehman said on its first-quarter conference call that it expected to write down level 3 assets by $875 million for that period, but in its quarterly filing, it said it had $228 million of realized and unrealized gains in the assets.

That swing of more than $1 billion is not reflected in Lehman’s income statement, although there may be adjustments elsewhere in the bank’s financial statements.

Add it all up, and Lehman should raise a good deal more capital, Einhorn said, noting that if the firm does not do so on its own, regulators should make it do so.

Speaking on CNBC in April, Lehman Chief Financial Officer Erin Callan said the investment bank was cooperating with the U.S. Securities and Exchange Commission’s inquiry into short-sellers spreading rumors.

Said Einhorn on Wednesday, “When management teams <complain about short sellers>, it is a sign that management is attempting to distract investors from serious problems.”

Reporting by Dan Wilchins, editing by Dave Zimmerman, Richard Chang

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