Lehman Brothers Holdings Inc is expected to follow in Merrill Lynch & Co Inc’s footsteps and sell a lot of risky assets at a loss. But shedding the assets may create another headache for Lehman — the need to raise large amounts of new capital, including common equity. Any capital raise would be painful for Lehman and its shareholders, given that the company just raised $6 billion in June and trades at a significant discount to its book value, or the net accounting value of its assets. But Lehman, the fourth-largest U.S. investment bank, may have little choice as it wrestles with roughly $65 billion in mortgage-related assets, particularly after Merrill Lynch agreed to shed $30.6 billion in toxic assets at a fire-sale price of 22 cents in the dollar, analysts said.
The myth that Merrill Lynch got 22 cents on the dollar still persists. Merrill Lynch actually got 5.5 cents on the dollar with a chance of getting more later. See Not Practical To Tell The Truth for more details. What Merrill Accomplished was getting those nearly worthless CDOs off its balance sheet for something that at first glance appears to have been 22 cents. Lehman had roughly $65 billion in mortgage and real estate-related assets on its balance sheet as of May 31. Brad Hintz, an analyst at Sanford C. Bernstein, wrote in a note on Monday that any loss much greater than $1.5 billion — which translates to selling $30 billion at a discount of at least a 5 percent to their current value on Lehman’s books — would likely force Lehman to issue at least some common equity. More
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