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Is Lehman Brothers New Red-Headed Stepchild Of Financial Service?


Investment bank caught in crosshairs of scrutiny.


Investment banks and brokerage firms have almost universally taken a beating due to weakness in both the domestic economy and equities markets. That's hardly a state secret. Equally unsurprising is how the press has worked the story of the group's struggles from countless angles. But the lion's share of less-than-flattering press has been reserved for Citigroup (C), Merrill (MER) and Bear Stearns (BSC) - and perhaps for good reason.

That may be about to change. The new, or rather the next, target of the press corps' wrath: Signs point to Lehman Brothers (LEH).

According to CNBC, "On Wednesday, Ladenburg Thalmann analyst Richard Bove twice lowered his price target for the company, settling it at $35 and cut his rating on the stock to 'Sell' from 'Hold.'" Before the two price target cuts, Bove's price target was $48.

The article goes on to point out that "on Thursday, David Einhorn, president of Greenlight Capital, railed against Lehman in a speech, saying the investment bank used special one-time charges and gains to artificially inflate its first-quarter results."

And finally, CNBC reports that "Lehman Brothers said Friday Einhorn takes items from the company's regulatory filings and 'distorts them to relay a false impression' of Lehman's financial condition."

Right off the bat, it's worrisome that a high profile and generally well respected analyst like Bove has taken such a negative stance. The guy has been around the block many times (approximately 35 years), has weighed in correctly on numerous situations and is reportedly so valuable that he was a determinant in Ladenburg's acquisition of Punk Ziegel, where he was an analyst.

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Second, David Einhorn, who reportedly is a "short," is a big thorn in Lehman's side. In fact, he has been quite vocal in the past about Lehman and won't let go. That's a problem for the firm because he has the ability to capture headlines and raise doubt within the investment community, making it difficult for the company to get its more upbeat message across.

Third, instead of merely dismissing Einhorn, Lehman should be more emphatic in its defense. Because the company seems to have acquiesced, it leads me to believe, right or wrong, that he may be onto something. Lehman will need to be more aggressive in demonstrating why Einhorn is wrong, or the stock could remain under pressure in the near term.

Fourth, with the stock in the lower end of its 52-week trading range, there's a legitimate concern that unless management is able to boost the share price, that tax loss selling could be extremely harsh this year. In the very near term, this string of bad news could cause some of its institutional stockholders to jettison a portion of their positions for window dressing purposes at the end of the second quarter.

Fifth, Einhorn continues to believe that more write-downs could be in store because Lehman is such a big underwriter of mortgages. If proven right and write-offs do start to pop up, that could put the kibosh on the current full-year estimate of $3.95 per share.

Lehman had a really bad week last week and the combination of Richard Bove's less-than-optimistic outlook and David Einhorn's relentlessness leads me to believe the worst may not be over.

Lehman was off more than two points on Friday, and down a smidge in after-hours trading.

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No positions in stocks mentioned.

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