From Canadian Dimensions :

” Without naming names quite yet, what would you think of a company that accomplished the following in 2007?

• Wrote down book value from $39 billion to $32 billion or from $41.35 to $29.34 per share.
• Increased shares outstanding from 868 million to 939 million.
• Increased Treasury Stock from 351 million to 418 million.
• Increased long-term borrowings from $147 billion to $201 billion.
• Increased preferred stock issuance from $3.1 to $4.4 billion.
• Increased Total debt to common equity to 2816.81%.

I could cite 20 or more similar financial ratios and they are all stunning.
Who is this firm? Merrill Lynch (MER)

Some statistics on another potential bad bank:

• Wrote down book value from $35 billion to $31 billion or from $32.67 per share to $28.56 per share.
• Increased long term borrowings from $127 billion to $160 billion.
• Increased total debt to common equity to 2496.53%.
• Maintains an $88 billion position in Level 3 assets, or 283% percent of shareholder equity.

Who is this firm? Morgan Stanley (MS)

From WSJ.com: Lehman Moves to Raise$3.45 Billion in Fresh Capital

Lehman Brothers Holdings Inc., facing persistent if vague rumors of financial trouble that have driven down the value of its shares, is turning to the markets to raise up to $3.45 billion in fresh capital. This first line, in and of itself, lends credibility to the rumors of Lehman running short on capital. Did they not just come out twice with public statements declaring they had ample liquidity of over $30 billion to finance their operations and that the negative rumors were unfounded, ala Bear Stearns - pre-government bailout? Why in the world would they hit the capital markets to dilute their current shareholders if they had so much ample capital and liquidity to begin with? I hear it is preferred with a 7-7.5% dividend and 30-35% conversion premium. If anything, this is a reason for shorts to pile on this stock tomorrow for it shows they may not have been as straightforward or honest as they could have been - or at least as honest as Mr. Schwartz of Bear Stearns a few weeks ago.

Lehman said Monday it will try to sell up to 3.45 million shares of convertible preferred stock. The aim is to raise funds now while delaying the pain for current shareholders, whose holdings will be diluted when the preferred stock converts into common stock at a later date.

The move by the fourth-largest U.S. investment bank comes amid an upswelling of negative market sentiment despite better-than-expected earnings and repeated assurances of financial strength. Lehman's shares lost more than a fifth of their value last week and were down another 2.6% recently in post-market trading after the announcement. Options traders placed heavy bets last week that the declines would continue. I would expect the shorts to really come down on Lehman for they really have a reason to pounce now. Remember, the Short me, Please! phrase. The company that has no cash problems is coming to the market to raise a bunch of cash.

Lehman Chief Financial Officer Erin Callan acknowledged the difficult market conditions in a release Monday. The bank will use the funds to reduce borrowings and bolster its capital base, she said. Uh Oh!

"Given the challenging environment and our previously stated view that it will likely continue the balance of the year, issuing convertible preferred is appropriate as it optimizes our funding and accelerates our plan to reduce leverage, and at the same time minimizes dilution to our shareholders," Ms. Callan said...

Awful smoke and mirrors PR, I feel insulted

Again, from WSJ.com:

Lehman Brothers Holdings Inc. has unveiled its latest attempt to try to shake the shorts.

On Monday, the firm announced it plans to issue $3 billion of preferred shares, a move that will strengthen its balance sheet and that it hopes will dispel speculation that it is facing a capital crunch. The question now: Will it be enough? "I think an issue of this size with the investors we have on board will put the false rumors about our capital position to rest," said Lehman Chief Financial Officer Erin Callan.

Not everyone is on board. The Wall Street brokerage has become a favorite target of short sellers, traders who make money by betting that a stock's price will fall. The shorts now will likely ask: If Lehman had enough capital, why did it need to do the new issue, which will dilute the stakes of existing shareholders by potentially increasing shares outstanding by about 5%? Do you truly expect them to ask anything else? I actually didn't believe that Lehman had a lethal liquidity problem because I was under the impression that they had at least $50 billion access to the Fed window, which I though would be rolled over for quite some time, although the Fed has indicated 28 days. It appears that I have been mistaken. If this action can change my mind, imagine those hawkish shorts who really were that bearish on Lehman. Then for Lehman to come out and try to frame this as putting the bear story to rest: poorly conceived, poorly executed and actually insulting PR. If they go done now, they are in part, the architects of thier own design.

Thursday, the stock fell almost 9%. Two weeks ago, in the wake of the forced sale of Bear Stearns Cos. to J.P. Morgan Chase & Co., Lehman's stock took another nasty tumble, falling 19% to a 4½-year low. Some Lehman shareholders blamed the decline on heavy selling by short sellers, who borrow shares and sell them, hoping to buy them back at a lower price and lock in a profit.

Monday, Lehman's stock fell 23 cents to $37.64 in 4 p.m. New York Stock Exchange composite trading. But in after-hours trading, the share price declined $1.12 to $36.52. Lehman maintains that the stock will rebound once investors learn both the terms of the offering and the fact that it has been "substantially" presold. Late last night, Lehman said there was $11 billion in investor demand for its offering.

So far this year, Lehman's stock is down 43%, compared with 16% for the Dow Jones Wilshire U.S. Financial Services Index and 23% and 14%, respectively, for rivals Goldman Sachs Group Inc. and Morgan Stanley. Lehman says that over the past few months it has been trying to lower the amount of debt it takes on relative to its assets, both by selling assets and now by raising capital -- so the new offering isn't necessarily aimed at beating back the short sellers.

Still, as of March 12, there were 46.6 million shares, 9.1% of Lehman's total float, sold short. That is up from 9.4 million shares at the beginning of the year, according to the NYSE. Investors also are loading up on Lehman options, another way to bet on a fall in the firm's stock.

The firm says it has enough cash on hand to weather the current crisis, $31 billion in cash and cash equivalents and another $65 billion in assets it can easily borrow against. Furthermore, thanks to a recent change in the rules, it now has access for the first time to Federal Reserve funds, a move that gives Lehman access to an essentially unlimited pool of money at the same rate as commercial banks. Not necessarily. Now that I have been pushed to critically consider the situation, I realize that Lehman can only borrow against certain collateral whose various haircuts are not necessarily made public (or at least I don't know about all of them). Once that collateral is used up, and it can be used up quickly when a considerable haircut is applied during a cash crunch, Lehman has to rely on extant cash and credit facilities. The problem with the credit facilities is that they are dynamic, and covenants can be tripped quickly when Lehman most needs the cash. That's the problem with liquidity, it is only liquid when you really don't need it. A more direct way of looking at it would be, "Why borrow at 7% and dilute equity when you can borrow at the discount window for less then half of that and not dilute equity? The answer probably lies somewhere next to limited borrowing capacity that no one in Lehman or the Fed will voluntarily make public."

...

This time around, the firm has publicly spoken out against the shorts. It has met with the Securities and Exchange Commission, and top management is actively trying to track down the source of rumors as they arise. I can solve this mystery. The source of the rumors is Lehman's balance sheet.

The main concern: Lehman's still-sizable exposure to the mortgage market makes it easy for critics to draw comparisons to Bear. A recent Bank of America report notes that mortgages represent 29% of total assets at Lehman, roughly in line with Bear, which had one-third of its assets in mortgages, and much higher than Merrill Lynch & Co. and Goldman Sachs, both at 12%, and 13% at Morgan Stanley. Ms. Callan estimates Lehman's total real-estate exposure is closer to 20% and it is a skilled operator in managing real-estate assets.

"Looking toward the remainder of 2008, Lehman investors will be nervously waiting to see if the firm, with its balance sheet loaded with $87 billion of troubled assets which are under pricing pressure and which can't be easily sold, will be able to navigate the continuing credit storm and the de-leveraging environment that we anticipate," wrote Brad Hintz, an analyst at Sanford C. Bernstein & Co. and a former chief financial officer at Lehman.

Nearly $31 billion of its holdings are commercial-real-estate loans. Even as it cut way back on making home loans, Lehman continued to lend to buyers of office buildings and other assets, and analysts expect it will take a hit on these this year.

A big concern is Lehman's 2007 investment in Archstone-Smith Trust, which it bought with Tishman Speyer Properties in May 2007, just as the real-estate market was beginning to melt. Lehman bought in at $60.75 a share. Archstone is now private, but shares of its publicly traded rivals are down substantially, suggesting Lehman's investment is underwater.

During a conference call to discuss its first-quarter earnings, Lehman said it currently holds $2.3 billion of Archstone's non-investment-grade debt and $2.2 billion of equity, both of which Ms. Callan said are being carried "materially below par." She said Lehman is working to sell assets and improve Archstone's financial profile. Lehman says it has taken write-downs on this investment, but the size of the haircut isn't known because it doesn't release this data on individual investments. If you go through my commecial real estate section, you should come to the conclusion that this should be way under water quite soon.

Lehman also has significant exposure to so-called Alt-A mortgages, which let borrowers disclose less information about their income than standard mortgages. These loans have been under increased stress in recent months as delinquencies have risen at rapid rate.

Overall, the bank has about $31.8 billion in residential-mortgage exposure and $13.5 billion is Alt-A. The firm has taken $3 billion in write-downs on the residential portfolio, a substantial portion of which was Alt-A. On this front, Lehman argues this positioned is hedged, meaning that any losses will be offset by gains elsewhere.

Short covering rallies
according to Bloomberg are responsible for GGP's growth (of course,
since the fundamentals are getting worse, not better) and Defaults on Insured Mortgages Rise 38% in February. Defaults
on privately insured U.S. mortgages rose 38 percent in February for the
14th straight month as record U.S. foreclosures forced the industry to
reimburse lenders for more bad loans.

For those that haven't noticed, I've begun sharing my early morning news and data routine with the blog. Here goes Monday moring EST.

Is the Fed running out of ammo?

If so, Trichet, King May Support Fed as Ammunition Runs Low: Federal Reserve Chairman Ben S. Bernanke has so far shouldered most of the burden of saving the global economy and financial markets. He may be about to get more help. With the credit crisis entering its ninth month, Bank of England Governor Mervyn King and European Central Bank President Jean-Claude Trichet are on the verge of new steps to spur lending and increase liquidity, say economists at Lloyds TSB Group Plc and Royal Bank of Scotland Group Plc. Interest-rate cuts may be next if the crisis persists.

``We're inching closer to the great global monetary easing,'' says Joachim Fels, co-chief economist at Morgan Stanley in London. Lloyds predicts King's next step will be to accept more types of collateral for loans. Trichet will pump more money into banks, RBS forecasts. Such measures would take Europe's two biggest central banks further down the path laid out by Bernanke this month.

The Fed chairman needs all the help he can get. In addition to lowering interest rates at the fastest pace in two decades, Bernanke has committed as much as 60 percent of the $700 billion in Treasury securities on his balance sheet to expand lending. The Fed has also offered a $29 billion loan against illiquid securities to assist the buyout of failing securities firm Bear Stearns Cos...

Rate Cuts

Meanwhile, the Fed has already lowered its target overnight rate by 3 percentage points, to 2.25 percent, since August. Unless the gap between the Fed and the European banks narrows, it risks fueling inflation in the U.S., slowing economies elsewhere and causing banks more pain, Deutsche Bank economists said in a March 24 report. "Stresses in markets have reached new heights,'' the report said. ``The significant difference in the approach to managing what is now a truly global financial crisis could aggravate the problems and cause more severe damage to the world economy.''

That has some analysts predicting that Trichet and King will have to cut rates sooner rather than later: Morgan Stanley's Fels predicts the U.K. central bank will cut in the next quarter, and the ECB will follow later in the year. "The ECB and BOE have stubbornly refused to cut rates, although extreme stress is visible in European financial and commercial real-estate markets,'' says Michael Shaoul, chief executive officer at New York investment-research firm Oscar Gruss & Son Inc. ``This intransigence is unlikely to last much longer.''

When I hear words like the great global monetary easing, my mouth waters. For this is an opportunity for easy money. Do you remember the Great Macro Experiment? Unless central banks allow us to go through some real pain to purge the sysetm (something which is apparently highly unlikely, especially in a presidential election year), the world is condemned to these extreme boom bust cycles. This is good for me since I won't have to change the name of my blog, and more importantly this befits my investment style quite well, allowing me the opportunity to do my thing. Unfortunately, I feel it wreaks havoc with global economic stability and health, but hey, what the hell do I know.