Lehman Leverage Still Too High, Einhorn Says

The level of risk on Lehman Brothers Holdings', balance sheet remains too high despite moves to improve its balance sheet strength, hedge fund manager David Einhorn told Reuters Monday.


After weeks of questions about its financial health -- fueled partly by Einhorn's public negative statements -- the No. 4 investment bank said it expects to post a $2.8 billion loss next week and said it raised $6 billion of new capital.

The forecast and capital-raising news sent Lehman stock down more than 10 percent.

It said it drastically pared down the size of its balance sheet by selling $130 billion of assets during the second quarter.

Monday's events supported arguments made in recent weeks by Einhorn, who said the firm and Chief Financial Officer Erin Callan had understated problems and Lehman needed to raise capital to support a balance sheet filled with risky assets.

The firm in recent weeks has assured investors that it was reducing leverage and played down Einhorn's credibility as a short-seller. In the end, Lehman was forced to sell equity that could fill a hole created by sizable losses.

"They've raised billions of dollars they said they didn't need to replace losses they said they didn't have," Einhorn said in a brief telephone interview.

A Lehman spokesman declined to comment beyond statements made by Callan in conference calls.

Einhorn noted Lehman is not the only firm that took on excessive leverage during the credit boom of recent years. Wall Street investment banks piled on debt and bulked up their balance sheets with all kinds of risky assets that are now difficult to sell, such as private equity, real estate and subprime mortgages.

Yet Lehman, Einhorn said, had been the most aggressive in terms of leverage and was most at risk given its exposure to hard-hit residential and commercial real estate markets.

Lehman on Monday said asset sales during the quarter reduced its gross leverage to 25 times equity and its net leverage was down to 12.5 times at the end of May.

Including the $6 billion of new capital, gross leverage was closer to 22 times equity.

"That still seems too high relative to the asset mix," Einhorn said. "There are still areas of significant concern, particularly in the commercial mortgage-backed real estate area."

Einhorn, who has made negative statements about Lehman in print and broadcast media, observed that Lehman marked down commercial mortgage-related positions by $700 million, on a gross basis.

"That seems questionable. There are probably other areas," he said.

Lehman on a conference call later Monday noted it took significant write-downs on its exposure to Suncal Cos, a California property developer; and Archstone-Smith, an apartment building REIT. These deals have been highlighted by Einhorn, as he questioned whether Lehman had understated its potential problems.