Lehman (LEH) has just begun to defile itself. After several quarters of losses and promises of better days, the press is reporting that the brokerage will have negative earnings for the most recent period that will total at least $1.8 billion.

Big earnings deficits are almost always followed by a need to raise money.

Lehman appears to have two options. One is to sell off a valuable asset. That might be a part of its real estate portfolio or its money management arm Neuberger Berman. The other way out for Lehman is to raise more capital via a sale of shares or debt. That amount would probably have to be in excess of $4 billion, if the company wants to create a cushion against future losses.

Either path undermines the value of Lehman’s common shares, and that value could easily go to zero by the end of the year. The company’s current market cap is only $11 billion. So far this year, Lehman’s stock prices is down almost 75%.

An investment in Lehman would be risky. The money would probably come in below the current share price. That could clearly knock the dollar value of the firm’s stock from its current level of $16 down to $9 or $10. That would bring Lehman’s market cap as low as $6  billion.

Lehman will raise more capital this month or next. If it has to go to the well again in the Fall, common shareholders will be left with a penny stock.

Douglas A. McIntyre

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