Market breathes sigh of relief on Lehman rally

By Jennifer Ablan

NEW YORK (Reuters) - Lehman Brothers, which has been besieged by reports that it may need to raise capital to shore up its balance sheet, won a key vote of confidence from a top bond manager on Wednesday, who said he was buying Lehman's securities and was not at all hesitant to trade with the bank.

The comments helped stanch three days of losses that had chopped $4 billion off Lehman's value, as other Wall Street players voiced confidence in Lehman and said they do not expect it to go the way of former rival Bear Stearns.

Investors were also comforted by news that Lehman had significantly reduced its borrowing from the first quarter.

Lehman, which has been dogged by speculation since late last week that it could become the next victim of the global credit crisis, on Tuesday denied rumors that it borrowed capital directly from the Federal Reserve.

On Wednesday, Lehman began the day again under heavy pressure about its financial condition after The Wall Street Journal reported the smallest remaining major Wall Street investment bank was looking to raise capital overseas.

Later, it reported that Lehman was also willing to give U.S. institutional investors access to its books and had told at least one pension fund that.

Concerns eased about a repeat of the run on the bank witnessed in Bear Stearns' demise after Dan Fuss, the vice chairman of fund manager Loomis Sayles, said he'd been buying Lehman bonds in recent days.

"The credit is good at Lehman," Fuss said. Loomis Sayles, oversees more than $100 billion in fixed-income securities.

"We have no hesitation whatsoever at all in dealing with Lehman," he said. "They are a fine firm and financially strong."

DELEVERAGING

Further assurance came when a source told Reuters the bank had reduced its leverage during the second quarter.

Lehman is expected to report second-quarter net leverage ratio of about 12.5 times versus 15.4 times in the first quarter, a person familiar with the matter told Reuters on Wednesday. Lehman's gross leverage is expected to be about 24.5 times versus 31.7 times in the first quarter, the source said.

Gross leverage ratio is total assets divided by total stockholders' equity, while net leverage ratio is net assets divided by tangible equity capital.

"It seems that a lot of people want to break Lehman, but in my opinion that will be hard to do," said Greg Peters, global head of fixed-income research and economics at Morgan Stanley in New York.

Lehman shares, which fell to their lowest level on Tuesday since the meltdown of Bear Stearns in mid-March, snapped a painful three-day decline on Wednesday, rising 2.58 percent to