By STEVEN M. SEARS
barrons.com
The investment bank’s credibility is shot and its put options have gotten red-hot.
ON A DAY WHEN MOST stocks are rising simply because some 90% declined in the previous trading session on Friday, Lehman Brothers (LEH) is an exception.
The stock of the nation’s fourth-largest investment bank fell about 11% in midday trading Monday after the company warned investors that next Monday’s second-quarter financial report will reveal a big loss.
Ineffective hedges, and apparently a breakdown with the bank’s decision making, caused Lehman to unexpectedly announce that it thinks it lost $2.6 billion, and that it will now rebuild its finances by issuing $4 billion of common stock priced at $28 per share and $2 billion of mandatory convertible preferred stock.
Of course, this is just a pre-announcement, and the final results could be different when announced next Monday, said Lehman’s chief financial officer, Erin Callan, in a morning conference call with investors and analysts.
The options and debt markets had expected earnings troubles, though arguably not even the legion of traders aligned against Lehman anticipated a loss of this magnitude. Lehman’s expected second-quarter equals $5.41 per share, markedly higher than the analyst consensus of a loss of 20 cents.
Put options on Lehman, which increase in value when the stock price declines, were obscenely expensive last week in anticipation of Lehman’s weakened position. Today, they are still richly priced, and though they have declined somewhat from last week’s doomsday scenario level, anyone interested in hedging against further weakness in Lehman’s stock will pay a princely risk premium.
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