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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

Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring. “The second half of the year is shot,” said Michael T. Darda, chief economist at the trading firm MKM Partners in Greenwich, Conn., who was until recently optimistic that the economy would continue expanding. “Access to capital and credit is essential to growth. If that access is restrained or blocked, the economic system takes a hit.” Companies that rely on credit are now delaying and canceling expansion plans as they struggle to secure finance.

Drew Greenblatt, president of Marlin Steel Wire Products, figured it would be easy to get a $300,000 bank loan to finance a new robot for his factory in Baltimore. His company, which makes parts for makers of home appliances, is growing and profitable, he said. His expansion would add three new jobs to an economy hungry for work. But when Mr. Greenblatt called the local branch of Wachovia — the same bank that had been aggressively marketing loans to him for years — he was distressed by the response. “The exact words were, ‘We’re saying no to almost everybody,’ ” Mr. Greenblatt recalled. “This is why God made banks, for this kind of transaction. This is going to slow down the American economy.” More

Posted by Karl Denninger
The Fed can halt deflation only in the instant case, and in the four dimensions that actually govern reality that fourth dimension, time, derails attempted printing every time. Why? Because The Fed cannot control what people will demand in order to loan out their capital. It can set a target rate and then defend it by either injecting or withdrawing liquidity, but if it tries to set the rate too far under the actual trading rate (that is, the true cost of borrowing is higher than what the fed funds target is set to) the amount of money necessary to defend that too-low rate rises to infinity! Once The Fed prints the perception is that they will do so again. As such interest rates in the market rise to the actual monetary inflation rate plus a margin for the risk of The Fed doing it a second time. See the problem? The margin is always positive, otherwise nobody would lend at all! More

(Bloomberg) — IndyMac Bancorp Inc., battered by the mortgage crisis, will cut more than half its workforce and said it’s been unable to raise new capital as losses mount. IndyMac will slash its workforce by 53 percent to 3,400 employees and curtail lending, the Pasadena, California-based company said on its Web site. Regulators have advised IndyMac that it’s no longer “well capitalized” and the bank said that it will report a wider loss in the second quarter than in the previous period. We don’t expect to be able to raise capital until there is more stability and less uncertainty in the housing and mortgage markets,” Chief Executive Officer Michael Perry said in the statement. IndyMac, which was the second-biggest independent U.S. mortgage lender last year behind Countrywide Financial Corp., has lost almost $900 million in the prior three quarters amid tumbling home prices and record foreclosures. The company is focusing on mortgages that can be sold to government-sponsored Fannie Mae and Freddie Mac. More