Pain for Lehman holders

Shares may not get a boost as firm seeks to exit rough patch BY DAvID REILLY AND PETER EAVIS

The good news about Lehman Brothers Holdings Inc. is that it's no Bear Stearns. The firm won't dis appear overnight. The bad news is its survival will still be pretty pain- ful for shareholders.

Unlike Bear, Lehman has access to the Federal Reserve's discount window, allowing it to tap liquidity that wasn't available to investment—banks back in March. Lehman also appears to have lengthened the terms of its col lateralized borrowings, meaning it is less likely to face a debilitating run on the bank.

Trading partners, while ner vous, don't seem to be pulling busi ness from the firm, even after it movedoutErin Callan as chief fman cial omcer and ousted Joseph Gre- gory as chief operating officer. Credit markets haven't hit the panic button, in contrast to mid- March, when Lehman's debt dropped sharply in value.

So Lehman may have some breathing room, perhaps even enough to allow Chief Executive RI- chard Fuld to continue fighting against a sale of the firm. But, with the credit crunch continuing to bite, it is tough to see how Lehman can earn its way out of its current predicament.

The massive dilution that has re suited from raising new capital will mute returns for years to come. At the same time, Lehman is cutting back on the use of borrowed money, which will act as a further drag on profitability. That makes it tough to see how Lehman can hope to achieve anytime soon the midteen returns on equity that Ms. Callan pledged earlier this year.

There also is the continued threat that Lehman's capital Won't prove sufficient in the face of losses that could stifi hit its books. When it releases second-quarter results Monday, Lehman is expected to re port, for example, that it still has about $30 billion in residential- mortgage assets and about $35 bil lion in commercial-real-estate as- Sets.

These exposures leave it vulnera ble to the vagaries of the real-estate market and to further write-downs. So any earnrngs power the firm mus ters might simply offset losses.

In light of that, it is worth trying to figure out Lehman's real net worth. Last week, Lehman said its book value per share, adjusted to re flect a $6 billion capital increase that included the sale of $4 billion of common stock, would be $33. It sold new shares, meanwhile, for $28.

But in a note to investors Thurs day, Bank of America analyst Michael Hecht took a deeper dive. He started with the firm's tangible book value, which excludes the value of intangible assets and good- will, and subtracted out gains the firm has booked in recent quarters due to falls in the value of its own debt. He then applied a 25% dis count to the firm's holdIngs of hard-to-value fmancial assets.

The result? Book value per share of about $22.50, which wasn't too far from Thursday's close of $22.70 on the New York Stock Exchange. Friday, the shares rose nearly 14% to $25.81.

Until Lehman can prove that it has a future and find a way to regain lost investor trust, there is no rea son to see why the shares should trade above that level. Or why a po tential buyer, if the firm decides it can't survive on its own, should pay much more.