Lehman Brothers (LEH) is smart to raise another $6 billion, and the move will probably save it from succumbing to the same fate as Bear Stearns. Given the terms on which Lehman is raising the money, however–$28 a share for the common stock component–this is clearly a fire sale (despite Lehman’s protestations as recently as late last week that it “didn’t need” capital).
The firm’s massive write-downs in Q2, moreover, show that it badly underestimated the state of its balance sheet and the size of the capital infusion it would need to get through the crunch.
Lehman’s management, starting with CEO Dick Fuld, will likely continue to frame the firm’s problems as an act of God–an unforeseeable “perfect storm” or “100-year flood” that management should be congratulated for surviving.
Companies can–and should–be built to survive storms, and Lehman apparently wasn’t. The firm made its biggest mistakes when everything appeared to be going well–by taking on too much leverage and crappy debt. That the firm has reacted to the crisis with more urgency than Bear Stearns is fortunate, but this doesn’t let management off the hook for getting into this mess in the first place.
Lehman’s crisis has wiped out the past 8 years of stock gains, and the rescue will dilute current shareholders by up to a third. Lehman’s management needs to take responsibility for that–by stepping down. Once they’re gone. new management can begin to rebuild the firm’s credibility.
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