Lehman shares drop after capital-raising report

NEW YORK (Reuters) - Lehman Brothers Holdings Inc LEH.N shares dropped 6.7 percent on Wednesday after a report that the investment bank may look to raise more capital added to questions about the credibility of the company's management.

The Financial Times said on Wednesday that Lehman had sought capital from South Korean financial institutions and may still enter a deal with them later this year.

That news comes just two days after Lehman raised $6 billion by selling stock and convertible preferred securities and said it expected to post a quarterly loss of $2.8 billion next week.

"They diluted the shareholders that much, and now they may need more capital? There's a real crisis of confidence in management here," said Bill Smith, chief executive officer of Smith Asset Management, which sold its Lehman shares at the open Wednesday morning.

A spokesman for Lehman declined to comment.

Lehman shares dropped amid a broader decline in financial stocks after rumors swirled that Goldman Sachs Group Inc (GS.N) could take write-downs. A spokesman for Goldman declined to comment.

Lehman shares suffered the biggest decline among the top U.S. investment banks. That was due in part to questions about the company's management, said Anton Schutz, a portfolio manager at Mendon Capital, which owns Lehman shares.

"Investors were really disappointed on Monday," he said.

Lehman shares fell $1.83 to $25.67 on Wednesday, reaching their lowest intraday level since mid-March, when Bear Stearns faced a run on the bank and agreed to sell itself to JPMorgan Chase (JPM.N) at a bargain price. Lehman shares have fallen more than 18 percent since Friday's close and are down more than 65 percent over the last year.

Goldman shares declined 1.7 percent to 164.36, while Merrill Lynch & Co Inc MER.N shares fell 3.8 percent to $36.50.

The Federal Reserve is willing to provide short-term financing to investment banks now, which makes another run on an investment bank much less likely, according to analysts.

Lehman is taking steps to scale down its risk. It decreased assets by about $130 billion in the second quarter and has raised about $10 billion of equity and equity-linked capital in recent months.

Brad Hintz, analyst at Sanford C. Bernstein, said in a note to investors on Tuesday that Lehman was taking the steps necessary to make its balance sheet "bulletproof," but added that Bernstein believes the company faces significant challenges in the future.

The cost of protecting Lehman's debt against default in the credit derivatives market rose 10 basis points on Wednesday to 257.5 basis points, or $257,000 a year for five years for every $10 million of debt protected, according to CMA DataVision.

The cost of protecting Goldman's debt against default rose 10 basis points to 122.5 basis points.

(Reporting by Dan Wilchins; additional reporting by Karen Brettell; editing by Dave Zimmerman and John Wallace)