A tática que o Lehman quer aplicar chama-se Bear Corner. Só a título de curiosidade: Uma tentativa de Bear Corner foi o estopim da crise de 1907. 

By SUSANNE CRAIG
April 1, 2008

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%?

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.

Lehman is no stranger to the skeptics. The brokerage and its chairman, Richard Fuld Jr., fought off rumors about a cash crunch in 1998 that were triggered by the near-collapse of hedge fund Long Term Capital Management. At that time, the firm hired a private-investigation firm to get to the bottom of the speculation circling the company. Since then, Mr. Fuld has won praise for diversifying Lehman, long known as a bond house, into lucrative areas like stock trading and investment banking.

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.

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.

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.

Write to Susanne Craig at susanne.craig@wsj.com

Dealing with uncertainty is always a key challenge for investors. But dealing with uncertainty doesn’t mean avoiding it – on the contrary, it is often fuzziness about a company’s future that creates the type of opportunity bargain-hunting investors cherish.

Wall Street in the main hates uncertainty, which manifests itself in depressed share prices of companies whose prospects lack “visibility.” But where the market can err is in confusing uncertainty with risk. Just because a company’s future is highly uncertain doesn’t mean an investment in it is risky. In fact, some of the best potential investments are highly uncertain, but have little risk of permanent capital loss. As hedge-fund manager Mohnish Pabrai describes it in his book, The Dhandho Investor: “Heads, I win; tails, I don’t lose much.”

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Among the many case studies Pabrai presents is the investment he made this decade in the funeral-home operator Stewart Enterprises. Following a debt- fuelled consolidation of the funeral-home sector, Stewart and other big players found themselves too leveraged as the economy soured. Stewart’s shares, as high as $28 in 1998, had fallen below $2 by the fall of 2000, trading at a minuscule price/earnings multiple of only three times.

While the market appeared to be betting on Stewart’s demise, Pabrai’s research indicated otherwise. Funeral homes were actually among the least likely businesses to fail, as non-price-sensitive customers and less-than dynamic competition resulted in stable profitability and growth over time. Stewart was producing positive free cash flow and had hard assets such as land and funeral-home properties valued conservatively at $4 per share, twice the share price at the time.

Stewart still faced great challenges in managing its crushing debt load, but Pabrai did what all smart investors do in dealing with the uncertainty the company faced: he identified the various ways the story might unfold and assigned probabilities to each.

He concluded that there was an overall 80 per cent probability that the company would deal with its debt problems in one of a few ways, in each case resulting in a doubled share price within two years. If the company went bankrupt – a scenario he assigned a 19 per cent chance – he believed the hard assets would more than cover the debt, leaving at least $2 per share in equity value. He saw only a 1 per cent chance of permanent loss of capital from the share price going to $0.

Given the 80 per cent chance of doubling his money and only 1 per cent chance of losing it all, Pabrai took the bet. While there was real uncertainty over exactly when and how the story would play out, he saw the risk of a permanent loss as extremely low. What happened? Soon after his purchase of Stewart shares, the company announced that it planned to sell international assets – which comprised about 20 per cent of revenues and produced little cash flow – to pay down debt. By March 2001 the company had paid down more than $50m of its debt and cash flow remained healthy – to which the market responded, taking the share price above $4. His target price reached, Pabrai sold.

A similar highly uncertain, but low-risk opportunity I see today is EMC’s storage business, excluding its stake in VMware. In late 2003, EMC paid $625m for VMware, a leading provider of software to the information storage industry. Following EMC’s spin-off of roughly 15 per cent of VMware in August, the company today is valued at more than $23bn, nearly triple the market-cap of EMC’s core business!

Is VMware, with less than a quarter of the operating income in 2007 of EMC’s core business, worth almost three times as much? Of course not. VMware is a hot stock in a hot sector and is likely highly overvalued, trading at approximately 56 times this year’s estimated earnings, while EMC’s core business is almost certainly undervalued – hence the opportunity for us.

An investor can isolate EMC’s core storage business by buying EMC and shorting out its stake in VMware, which creates an EMC “stub” at approximately $4.50 per share, net of cash. (Note that it can be difficult to borrow VMware shares to short, in which case one can buy puts.) We estimate that EMC’s core business will earn $0.60/share next year, so it is trading at a price/earnings ratio of 7.5, an absurdly low multiple for such a high-quality business. We think fair value is three-to-four times this.

One reason for this market inefficiency is the uncertainty about whether and when EMC might spin off completely its stake in VMware. The company has been coy about this, but our analysis of all 46 equity carve-outs of the past 10 years would indicate it’s merely a question of time before it spins off VMware and unlocks the unrealised value of its core storage business.

This is a classic case of a low-risk, high-uncertainty investment. At this price, we think we’re almost certain to make significant profits on this investment – we just don’t know when. The market hates such uncertainty and shuns it, resulting in a bargain for us.

The writer is a money manager who co-edits Value Investor Insight and co-founded the Value Investing Congress feedback@tilsonfunds.com