Five Dumbest Things on Wall Street: Aug. 22

Lehman -- Time for a Reality Check

Lehman Brothers (LEH Quote) is proving that dumbness begets dumbness.

First, Lehman shocked investors in June with a double whammy. It gave an unexpected warning that it would report a second-quarter loss -- the first in its history -- due to bad bets on the housing market. Plus, it announced plans to issue $6 billion in new stock, ultimately diluting existing shareholders' stakes by nearly 40% once preferred shares are converted.

Now Lehman is reportedly shopping around its valuable asset-management business, which has grown rapidly in recent years and accounted for nearly 40% of the firm's net revenue gains this year.

Why would Lehman sell one of the few bright spots in its book of business rather than ridding itself of the toxic mortgage assets that are causing the pain?

JPMorgan analyst Kenneth Worthington doesn't see such a sale as something shareholders or ratings agencies would look favorably upon. But Lehman's management has its head in the clouds about the value of its distressed assets -- and its own stock.

As Ladenburg Thalman's Dick Bove notes, Lehman's asset-management crown jewel, Neuberger Berman, is valued somewhere between $9 billion and $13 billion. That would make the rest of the company worth "less than zero" at Lehman's current market value of about $9.4 billion.

Meanwhile, Lehman recently failed to raise new capital from Asian investors because its asking price was too high at 50% above book value, according to the Financial Times.

Bove thinks "the stage is set for a hostile bid" if management doesn't get rational about valuations.

CEO Dick Fuld seems to be clinging to an image of the firm and its assets that is out of touch with reality.

Fuld, who has manned the helm through good times and bad since separating Lehman from American Express (AXP Quote) in 1994, needs to stop being so dumb if he wants to keep his job, keep the firm independent, and provide a positive outcome for shareholders.

-- Lauren LaCapra

Dumb-o-meter score: 85. Looks like they've got Lehman by the shorts.