Random Thoughts from Lehman’s 2Q Earnings Call

I just finished listening to Lehman Brothers (LEH) fiscal second quarter earnings call. Rather than try to examine Lehman’s indecipherable balance sheet, I thought I’d look at a few random topics that caught my attention during the call.

Regarding Lehman’s problems, CEO Dick Fuld began the call by saying “this is my responsibility.” If Fuld is responsible for Lehman’s troubles, why didn’t he join CFO Erin Callan and President/COO Joseph Gregory in being replaced? Fuld commented that they’re “having conversations about creating a position for Callan.” No explanation was given as to why Callan and Gregory were replaced, and we were not enlightened to any real changes with the shuffling.

A part of Lehman’s $2.8 billion second quarter loss related to the $22 billion purchase with Tishman Speyer Properties last year for apartment REIT Archstone-Smith. CFO Ian Lowitt said the completed asset portfolio of Archstone is valued at $328,000 per unit, discounted from an estimated $390,000 per unit replacement cost. He did not disclose whether Lehman independently determined the valuations or whether they came from other sources. It does not seem plausible that rental income would justify such a high value. According to an article in last week’s Wall Street Journal, rental rates have not even covered Archstone’s interest payments.

In response to questions from Oppenheimer analyst Meredith Whitney, Lowitt said Lehman could achieve a 15% return on equity (ROE) if they generate around $5 billion in revenues as they did in 1999. When Whitney asked him when Lehman is expected to generate that level of ROE, Lowitt said: “We’re very confident we can get there, but cannot provide a specific time to get there.”

Lowitt stated: “We do not expect to return to the market this year for capital.” How many times have we heard Lehman make that claim before? Fuld said Lehman is “going to be prudent how we’re going to deploy that capital.” The capital will be applied “on an incremental basis as we see opportunities.” If Lehman is going to apply this new capital to new business, then how would the new capital improve their balance sheet? (Callan told us last week that Lehman will use the new capital to expand business – no change here.)

Fuld responded to questioning from a UBS analyst that “If investment banks get access, I believe they (the Fed) have the right for oversight.” Fuld stated in the call he is on the Board of Directors of the Federal Reserve Bank of New York.

It appears that Lehman has done nothing more than play a game of musical chairs in the executive suite. After contradicting themselves so many times, can investors really believe what Lehman is telling them now?

Related Post: “The Two Faces of Lehman Brothers”

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