Lehman shares plunge on capital raising concern

NEW YORK Tue Jun 3, 2008 3:02pm EDT

The exterior of the world headquarters for Lehman Brothers can be seen in New York, May 19, 2008. REUTERS/Lucas Jackson

The exterior of the world headquarters for Lehman Brothers can be seen in New York, May 19, 2008.

Credit: Reuters/Lucas Jackson

NEW YORK (Reuters) - Lehman Brothers Holdings Inc LEH.N shares plunged as much as 14 percent on Tuesday to their lowest level since the meltdown of Bear Stearns on concern that Wall Street's smallest surviving major brokerage could need to raise more capital.

Lehman Brothers spokeswoman Kerrie Cohen declined to comment on a report in The Wall Street Journal that Lehman was considering raising billions of dollars in fresh capital.

A source familiar with the situation said Lehman had no need to raise capital and would only do so if the right market opportunity presented itself, or if the firm thought it would help investor perceptions. The source said a move to raise capital was only one of "dozens" of options for the investment bank.

The rout in Lehman shares dragged the broader market lower, and the Standard & Poor's Financials index .GSPF was on track for its lowest close since the broader market's 2008 low of March 17 -- the day JPMorgan Chase & Co (JPM.N) agreed to buy Bear Stearns at a fire sale price of $2 a share, later revised upward to $10.

"People are very leery of not having to go through another Bear Stearns type situation with Lehman Brothers," said Michael James senior trader at regional investment bank Wedbush Morgan in Los Angeles. "It's a fear factor thing. There may be nothing behind it, but there's a sell now, ask questions later mentality."

The newspaper quoted analysts and Wall Street executives as saying Lehman was likely to seek $3 billion to $4 billion. The Journal said the plans suggest the investment bank would post a loss for the second quarter ended in May deeper than the $300 million that various analysts have been expecting.

Some analysts said there was no urgent need for Lehman to further bolster its balance sheet.

"In our view, there is no immediate need to raise equity capital, and the company would only take this painful step in an effort to cease the drumbeat of negative perceptions," David Trone, an analyst for Fox-Pitt, Kelton, wrote in a research note.

In afternoon New York Stock Exchange trading, Lehman's stock was down $3.13 or 9.3 percent to $30.70.

Turnover in Lehman, which was the most traded stock on the NYSE, was far more than double the stock's 5-day average.

Lehman shares are down 55 percent so far this year, far underperforming the Amex Securities Broker Dealer index .XBD, which has lost 23 percent in 2008.

"There's a broad sense in the market that some of the brokers need to raise capital imminently, sooner than thought," said Peter Kenny, a managing director at Knight Equity Markets in Jersey City, New Jersey.

Despite the share drop and S&P's decision on Monday to cut its counterparty risk ratings for Lehman, other Wall Street firms do not appear to be pulling back from trading with it.

According to one equity derivatives trader who declined to be identified, Lehman is perceived to be "pretty well capitalized" and, although bank risk managers may have the firm on their radar screen, it would take a multiple-notch downgrade before firms stop trading with the investment bank.

"We would only be concerned if it got much, much worse," he said, adding: "They're a solid company; they're not a small regional bank or a regional airline."

Lehman might issue common stock, diluting current shareholdings, and will probably reveal its capital plans when it reports quarterly results the week of June 16, the Wall Street Journal said.

Lehman's market value is about $18.7 billion, based on Monday's closing stock price of $33.83, Reuters data show.

According to recent analysts' research notes, Lehman has been hurt by hedges used to offset losses in various securities.

Second-quarter losses from asset write-downs and ineffective hedges are likely to have topped $2 billion, the Journal said. The bank will also realize losses tied to job cuts, it said, citing a person familiar with the matter.

Lehman in May decided to cut around 1,300 jobs, or nearly 5 percent of its work force, a person briefed on the matter said. It had laid off more than 5,000 people since the middle of 2007.

CEO WAS CONFIDENT IN APRIL

Financial institutions globally have suffered more than $350 billion of write-downs or credit losses tied to risky subprime mortgages and other debt.

Many have raised billions of dollars of capital, including Merrill Lynch & Co Inc MER.N and Morgan Stanley (MS.N).

Standard & Poor's cut its credit ratings for Lehman, Merrill and Morgan Stanley on Monday, saying write-downs "may continue to depress earnings." <ID:nN02286902>

In April, Lehman Chief Executive Richard Fuld had said "the worst is behind us," in light of improved client trading activity and investor sentiment.

Two months ago, Lehman sold $4 billion of preferred shares, a stock-bond hybrid. In early May, it sold $2 billion of 30- year bonds.

Lehman is no stranger to worries about its cash problems. In 1998, Fuld had to fight off concern about Lehman's survival after the Long Term Capital Management hedge fund collapsed.

Raising new capital could help Lehman reassure investors who have in recent months questioned whether it might suffer the same fate as Bear.

Since the Federal Reserve began allowing investment banks to borrow directly, Lehman has accessed overnight financing several times, and fears of a broad market collapse have lessened.

Still, the credit crisis is expected to keep haunting markets.

"Credit turmoil should persist, though the market reaction might be less pronounced," said Thomas Lam, senior Treasury economist with United Overseas Bank in Singapore.

Last month, David Einhorn of Greenlight Capital Inc, who has sold Lehman shares "short" because he expects a decline, told investors Lehman should raise large amounts of capital because it has not taken enough write-offs for bad assets.

(Additional reporting by Varsha Tickoo and Tenzin Pema in Bangalore; Kristina Cooke, Ellis Mnyandu, Christian Plumb and Elinor Comlay in New York; Satomi Noguchi in Tokyo; and Kevin Plumberg in Hong Kong; editing by Gerald E. McCormick and Andre Grenon)

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