June 12, 2008 – 10:53 am

It’s wearing Lehman down. The steady friction generated by rubbing lies against the truth and constantly being called on to explain the difference is causing the bank’s execs to fray around the edges. Even if the shares double today, all it will cost Einhorn and the bears is money; the cost to a certain pair of executives cannot be measured on a balance sheet because it’s personal.
Lehman Brothers sacrificed two lambs today – one at the alter of public appearance, the other because she had served her purpose. The replaced President Joseph Gregory and the feisty and flamboyant Chief Financial Officer Erin Callan:

Lehman Brothers Holdings Inc. replaced Chief Financial Officer Erin Callan and President Joseph Gregory three days after the firm raised $6 billion to help survive the collapse of the mortgage market and reported the first quarterly loss since the company went public in 1994.

Callan, 42, who has been a prominent spokeswoman for the bank since she was promoted to CFO six months ago, will return to Lehman’s investment banking unit and will be succeeded by co-chief accounting officer Ian Lowitt, the New York-based firm said today in a statement.

After firing Gregory, the company lauded him:

Gregory “has been my partner for over 30 years and has been a driving force behind who we are today and what we have achieved as a firm,” Chief Executive Officer Richard Fuld said in the statement. “This has been one of the most difficult decisions
either of us has ever had to make.”

What you have achieved is the ruination and impending bankruptcy of your company at the decimation of shareholders’ investments.

Lehman shares have been pummeled this year, sinking more than 60 percent as the company’s efforts to shore up capital and reduce reliance on borrowed money have failed to dispel concerns that it faces more mortgage-related losses and diminished earnings prospects. Even after raising $6 billion on June 9, the stock has continued to drop.

Erin Callahan was let go just after rebutting the notion that Lehman is in deeper trouble than they let on.

Callan in particular has been criticized lately for the company’s performance and for not grasping the depth of Lehman’s problems.

In a conference call Monday, she rebutted rumors of deeper troubles at the firm and said ithe results of its efforts to raise capital would be a stronger bank going forward.

The reality is that anyone with a three-digit IQ would have a firm grasp of the depth of Lehman’s problems. The purpose and tenure of her new position is what she may or may not have grasped, but we go for the former. The kids on Wall Street have three-digit IQs:

Unlike Lehman’s two previous CFOs, Ms. Callan isn’t an accountant and had never worked in the finance department.

She embraces television, appearing frequently. She receives a slimmer daily financial summary than her predecessors, relying more on data from the trading-floor contacts built during her 13-year Lehman career.


To quash fears that Lehman could face the same kind of liquidity squeeze as Bear now being acquired by J.P. Morgan Chase & Co., Ms. Callan has had hundreds of face-to-face meetings and phone calls with investors and trading partners.

Or perhaps to do battle with the loathsome, hated and feared King of Bears, short seller David Einhorn. Whatever the tactics, the overall strategy is clearly to situate the high heel-wearing, high five-slappin’ madam of finance at front and center stage to keep Lehman Brothers alive for a few more weeks. It’s a high-exposure high-risk position, but it payed off through Q1 of 2008:

Lehman Brothers Holdings Inc. had a lot riding on Erin Callan, its chief financial officer, during an earnings conference call in March. Speculation was swirling that the Wall Street firm might become the next Bear Stearns Cos.

After sifting through the numbers for nearly an hour, Ms. Callan coolly answered more than 20 analyst questions. Then she strode down to Lehman’s bond-trading desk and high-fived trading executive Peter Hornick. Later that day, bond traders gave her a standing ovation, a Wall Street rite typically reserved for CEOs. Profit had plunged, yet Lehman shares surged 46%.

So Callan, through bold statements and short slandering, staved off a financial and stock collapse through the first quarter. By doing so she gained a bit of stardom. Despite all this, the finical media (WSJ here) breaks its back to promote Callan as a straight shooter:

“Ms. Callan’s rise also shows that the formula for fending off a repeat of the crisis of confidence that sank Bear, threatened Lehman and still hovers over Wall Street includes both salesmanship and smarts.”

Ms. Callan had been lauded by some for pushing back against Mr. Einhorn,…

Even Oppenheimer analyst Meredith Whitney, a credit crunch star herself, comes to pay homage. Whether it’s because of the good ole gal club or Oppenheimer’s contribution to Lehman’s cause, here’s what she said:

“She is going out on a limb to provide more transparency in Lehman’s earnings, business and strategy,” Ms. Whitney says. “As long as things play out according to her guidance, she will solidify her reputation among investors.”

Really? Let’s ask Einhorn. Actually, it was easy to see she’s a hired gun as the attacks on short sellers began and the facts came in.

Lehman Brothers reaction to shortseller David Einhorn’s argument that the firm hadn’t written down the value of its debt portfolio enough was to try to destroy Einhorn’s credibility:

Mr. Einhorn cherry-picks certain specific items from our quarterly filing and takes them out of context and distorts them to relay a false impression of the firm’s financial condition which suits him because of his short position in our stock…

We are all entitled to our own opinion, but not our own facts. Einhorn’s facts show a $2.8B loss, $6B in fresh capital raised, and that credit-default swaps have also widened out, reflecting a higher cost of insurance against default. Protecting $10M in bonds against default for five years now costs anywhere from $300,000 to $330,000, according to Phoenix Partners Group, compared with $265,000 before the news.

Straight shooter, huh? So, Einhorn was right and Lehman was lying and the credibility of the latter has been largely destroyed. The credibility of the finical media who put such a straight face on Callahan was also thrown to an all-time low as they bowed to their corporate owners and advertisers to smear Einhorn. To be certain:

Blaming shortsellers is a convenient excuse, of course, because it points the finger at someone other than those who actually deserve criticism–weakening companies, wrong (or gullible) investors, company managers who refuse to acknowledge reality. This isn’t to say that some shortsellers don’t spread false rumors or lies or just “talk their books.” Of course they do. But the latter is no different than stock owners who breathlessly talk up their books all day long on CNBC or make false claims to drive stocks higher.

But Einhorn was right at every turn and it would take a lot more than some financial media sharp shooters and an ad lady’s smear campaign to keep Lehman Brothers from coming apart at the seams.


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