Kass: Lehman Can't Blame Shorts

Updated from 11:59 a.m. EDT

This blog post originally appeared on RealMoney Silver on April 2 at 8:15 a.m. EDT.

Yesterday, in an interview on CNBC with Maria Bartiromo, Lehman Brothers (LEH Quote) CFO Erin Callan called on the SEC to investigate potentially abusive tactics of short sellers, whom she claimed were responsible for the continued pressure on her company's shares. (It is important to note that I currently have no stake, long or short, in Lehman's shares).

Callan's claim was shared by many Lehman shareholders, members of the media and others, including our own Jim "El Capitan" Cramer.

Here is her CNBC interview.

Implicitly, Lehman's CFO seemed to place a primary role on short sellers as the proximate cause for Lehman's share weakness. And, by inference, Ms. Callan dismissed the role that the following items may have had in the slide of the company's shares:

• Lehman's disappointing earnings and revenue results, down 30%;
• a levered balance sheet in which Lehman's liquidity is, to some degree, dependent upon the "kindness of strangers";
• its broad mortgage and fixed-income exposure; and
• an uncertain profits future, though she alluded to the likelihood of continued challenges "for several quarters to come" late in the interview.

Lehman's CFO contended that "perception trumps reality" and that the $4 billion convertible raise this week "endorsed the value of the franchise" -- even though, days before, Callan dismissed the need for capital.

When push came to shove, however, she claimed an escalation of the rumors and observable trading volume in Lehman's shares necessitated the capital-raising mode, which caused about a 6% dilution in the company. Her contention was that, recently, the normal daily trading volume had risen by nearly tenfold, suggesting that short selling (which purportedly continued to pressure Lehman's shares) was dramatically on the rise.

Let's examine her claims that short sellers have had an untoward role and have pressured Lehman's share price.

• At yesterday's close, Lehman's equity capitalization stood at $24.45 billion.
• Lehman has 551 million shares outstanding, and its float is approximately 528 million shares.
• As of March 11, 2008, only 46.5 million shares were short, representing only 8.4% of the outstanding shares and only 8.8% of the float.
• Over the past three months, Lehman's average trading volume was about 29 million shares a day, and over the last 10 days, the average trading volume was nearly 45 million shares. Therefore, days to cover are only 1.6 and 1.0 days, respectively, very low ratios.
• The short interest has risen by only 3.3 million shares since last month.

Now, let's do a quick compare and contrast with Merrill Lynch (MER Quote):

• The short position in Merrill is about 37 million shares, or 4% of the outstanding shares and of the float.
• The short position has risen by 5.5 million shares in the last 30 days and represents 1.2 days to cover on the three-month average daily volume and slightly less than 1.0 days based on the last 10 days' average trading volume, not materially different to Lehman.