Lehman Brothers Raising Capital After Posting Billions In Losses

NEW YORK — Lehman Brothers Holdings Inc. on Monday confirmed fears on Wall Street that the credit crisis isn't quite over, and it left investors to wonder if other major investment banks face the same set of risks.

The nation's fourth-largest investment bank said wrong-way trading moves and risky mortgage-backed securities plunged it into a nearly $3 billion second-quarter loss. It marks the first time Lehman was unable to post a profit since going public in 1994.

Its stock fell nearly 9 percent and helped drive a broad sell-off in bank and brokerage shares.

Lehman's top executives, who have repeatedly assured investors that their books were safe, will fund the firm's survival by raising $6 billion of fresh capital. It is a move many of Lehman's competitors have already been forced to make.

The announcements, made before the official June 16 release date of Lehman's results, were an attempt to calm a market still badly shaken by the near collapse of Bear Stearns in March. Analysts were disappointed that Lehman's loss was much deeper than they expected, and felt it could have an impact on rivals.

"There is a broader element to all this," said David Trone of Fox-Pitt Cochran. "Management considered this to be an aberration, but I think you'll see similar results in form and structure, just the magnitude will be smaller."

Sanford C. Bernstein analyst Brad Hintz, a former chief financial officer of Lehman, said one concern is the $130 billion of mostly residential and commercial real estate assets the firm sold during the quarter. Those sales triggered billions of dollars of gross mark-to-market adjustments _ or accounting changes to the value of assets _ since the beginning of last year.

He believes that if those prices are deeply discounted, it would set a precedent that could hurt rivals like Merrill Lynch & Co., Morgan Stanley, and Goldman Sachs Group Inc. "There could be a modest domino effect," Hintz said. Those companies have also had write-downs of mortgage-backed assets, with Merrill taking a heavy enough hit that it lost its CEO. Goldman is believed the be the strongest of the Wall Street companies.

Story continues below

advertisement

Further, Lehman's investments to hedge against troubled assets on its books backfired, and CFO Erin Callan said they "were significantly impacted" during the past few months. She said the highest point of the market's disruption this year was in March, but conditions have eased since then.

Lehman said it expects to lose $2.87 billion, or $5.14 per share, for the period ended May 31, compared with the $1.3 billion, or $2.21 per share, it made in the year-ago period. Analysts had expected the company to report a loss of just 22 cents per share for the period, according to Thomson Financial.

CEO Richard Fuld said he was "very disappointed" in the quarterly results. However, he believes the additional capital _ raised through an offering to yet unnamed investors _ will help keep the company whole amid continued market turmoil.

There had been market speculation that Lehman was seeking outside investors to offset losses during the quarter and fortify its balance sheet. Some analysts felt the firm's balance sheet was the closest of all the Wall Street firms to Bear Stearns, which narrowly avoided bankruptcy in March through its government-sponsored sale to JPMorgan Chase & Co.

But so far, Lehman appears in better shape _ and possibly has generated more confidence among investors _ than Bear, which was badly undermined when panicky customers withdrew their money from the investment bank. Moreover, after the Federal Reserve helped engineer JP Morgan's buyout of Bear, investors have felt more secure that the government is unlikely to let a big investment bank fail.

Lehman is expected to raise capital by selling to mostly American investors $4 billion of new common shares and $2 billion of three-year mandatory convertible preferred stock. The convertible stock is required to be turned into common shares by the end of the three-year period.

The firm was under pressure after David Einhorn, who runs the hedge fund firm Greenlight Capital, vocally and publicly raised questions about Lehman's earnings during the first quarter. He said the company has not disclosed all of its losses, and felt Monday's announcement was only the start.

"Lehman is raising $6 billion that they said they didn't need to replace losses that they said they didn't have," he said in an interview. "Since the credit markets actually improved this quarter, such losses primarily reflect losses that might have been taken in prior quarters. A preliminary analysis of the pre-release and conference call suggests that there are still unrecognized losses on the balance sheet."

In addition, Lehman's stock sale will significantly dilute outstanding shares. As of March 31, Lehman had about 553.6 million shares outstanding. The common stock offering would add about 142.9 million shares, while the conversion on the preferred stock would eventually add as many as 71.4 million more shares.

Lehman shares fell $2.81, or 8.7 percent, to $29.48. Moody's Investors Service and Fitch Ratings both cut their ratings on Lehman, exacerbating the decline.

Comments

[insanityfollows]

I hope DeutcheBank comes through and bails out Lehman if it becomes necessary. A few weeks ago they had said they might, as well they should, because if Lehman goes down, they are all going to go down. The government backed the Morgan/Stearns deal, but the reason they approached JP Morgan is because JP Morgan was the only bank with enough cash on the books to do the deal. No one, including JP Morgan has enough cash to bail out Lehman. If Lehman fails, the only hope the worldwide banking sector has is to hope DeutcheBank or Royal Bank of Scotland or Bank of England step forward and bail Lehman out. If they don't, the entire banking sector will fail, and we are all in big time trouble. The government may be willing to do another deal, but with no US bank with enough cash, I'm not sure exactly how they are going to work it. Fun and games!

[outnow]

The banking crisis is back in the headlines and the worst is yet to come. The reason for banking as such has disappeared to a large extent. With the collapse of the securities bubble, the markets in which the banks played are gone. The banking crisis never went away. Wachovia Corp. the fourth largest bank holding company is in trouble - over 7 billion in write downs. Washington Mutual, the nations largest savings and loan bank, was already written down 9 billion and raised 10 billion in capital including capital from pirate equity fund TPG - "Texas Equity Group" In Britain North Rock was nationalized, Bradford & Bingley was sold for a mere pittance originally, and so on. GMAC has a deal with "B & B" to buy 4 billion in mortgages in the next year as GMAC tries to avoid bankruptcy of its own mortgage unit. State Street Corp. reported a 3.4 billion loss and Standard and Poors has downgraded Merrill Lynch, Morgan Stanley and Lehmann Brothers by a notch. The FDIC has downgraded the reports of "profits" reported by commercial banks in the fourth quarter of 2007 from 5.8 billion to a mere 646 million. Central banks in Europe and the Fed have made some 3.5 trillion in loans to the banks, accepting bad paper in return.

You are right; there is no company with enough cash to bail out the failing banks. Loans must be paid back. The Fed is stuck with illiquid securities.