Lehman's unanswered questions

NEW YORK (Fortune) -- Lehman Brothers finance chief Erin Callan wants to "end the chatter" about the beleagured investment bank's financial health. But the murmuring won't stop till investors get a fuller view of Lehman's exposure to risky assets.

Lehman (LEH, Fortune 500) stunned Wall Street Monday by posting a $2.87 billion second-quarter loss. Callan said Lehman's quarter was hit by $3.7 billion in asset writedowns, along with $500 million in trading losses and $700 million in losses tied to failed hedges on mortgage-related assets. The announcement came after a week in which Lehman shares dropped 12% amid reports that the firm would have to raise more money to shore up its balance sheet, or perhaps even sell itself.

In response, Lehman raised $6 billion Monday morning by selling common and preferred stock. CEO Dick Fuld characterized the quarter as a disappointment, but the firm maintains the sun will come out tomorrow. Callan said on a Monday morning conference call that Lehman, having spent the last quarter cutting its balance sheet down to size, is ready to start making money again, particularly in the fixed-income and prime brokerage businesses.

"Over the next six months," she said, referring to the billions the firm has raised this year, "we see lots of opportunity to put this money to work."

Callan added that investors worried about risks tied to declining real estate values should take heart in the firm's "very large" writedowns of residential and commercial real estate positions. Lehman has taken some $17 billion in gross writedowns over the past year or so, Callan said, offset in part by more than $7 billion in hedging-related gains. Meanwhile, the last quarter's flurry of asset sales - Callan said Lehman was "the most active seller of assets" this quarter, mostly in residential and commercial whole loans - should give Lehman shareholders confidence that the firm has marked its portfolios appropriately. The sales have given the firm "tremendous" price visibility, Callan added.

Many of Callan's comments on Monday's call seemed aimed at quelling fears that Lehman is sitting on a writedown time bomb. Hedge fund manager David Einhorn, who is short Lehman's stock, has questioned the firm's accounting, suggesting Lehman has failed to take writedowns on risky assets commensurate with the steep decline in many real estate-related markets. "We are comfortable that we have sufficient equity to cover those assets," Callan said Monday. "Where these are marked, they have real value."

Callan's remarks make clear that Lehman has made progress in reducing the risk of huge losses on souring mortgage-related holdings. But the question remains: Has Lehman done enough? The past week has shown that investors aren't likely to stop worrying about Lehman till they can do the math for themselves, and many details remain scarce.

While Callan characterized Lehman's writedowns of residential real estate-related holdings as "very large," she declined to answer a question about how big the writedowns are relative to the original portfolio - data that could help investors gauge the size of the haircut Lehman has taken. Comparing writedowns is more art than science, but in a market characterized by falling asset prices and risk-averse investors, the more information the better.

Callan also declined to answer a question about Lehman's exposure to so-called Alt-A mortgages, those made to borrowers with better-than-subprime credit histories but typically without full documentation. Alt-A delinquencies have soared in recent months, leading to substantial losses at lenders such as Downey Financial (DSL). She said she would have a fuller picture of Lehman's numbers when the firm posts a full second-quarter earnings report next Monday.

Thanks to the Fed's willingness to lend to investment banks, Lehman appears to be in no danger of suffering a Bear Stearns-like collapse. But until the outlook for real estate clears up, few investors will be eager to bet on the firm's revival.