Lehman to raise $3 billion to quash stability fears

By Dan Wilchins

NEW YORK (Reuters) - Lehman Brothers Holdings Inc, an investment bank beset by rumors of not having enough funding, said it plans to raise $3 billion of capital to quash questions about its stability.

Lehman's shares fell 2.8 percent to $36.60 in after-market trading after the planned convertible preferred share offer was announced, since it could result in more shares being issued.

Chief Financial Officer Erin Callan told Reuters the deal was meant to end questions about the bank's balance sheet, and the capital was not needed to offset the impacts of write-downs or losses.

"We have not changed our view on our real need for capital, but we have changed our view from a perception perspective," Callan told Reuters.

Questions about whether Bear Stearns Cos Inc had enough capital were enough to force what was once the fifth-largest U.S. investment bank to sell itself for a pittance. Lehman Brothers is the fourth-largest U.S. investment bank, and fears about its stability have helped push down its share price more than 40 percent since February.

The rationale for the deal struck some investors as odd.

"This just makes me scratch my head. Why do this if you don't have to?" said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati, which does not own Lehman shares.

The global financial sector is increasingly starved of capital after sustaining more than $200 billion of losses from subprime mortgages and other assets.

But Lehman says it has more than enough access to funds, and several large institutional investors have agreed to buy at least $2.5 billion of the convertible preferred offering. Smaller funds looking at buying into the deal said demand is strong. Lehman said it can sell up to another $450 million of additional convertible preferreds to meet extra demand.

A person familiar with the matter said investors had placed orders for more than $10 billion of securities in the sale, and that Lehman may ultimately sell $4 billion of securities.

Mike Holland, who oversees more than $4 billion at Holland & Co, is not trying to buy the convertibles, but says if the sale goes well, it could put fears about Lehman to rest.

"If investors thought there were real problems at Lehman, you couldn't find buyers for $3 billion of securities at any price," he said.

BELOW BOOK

Lehman shares trade below their book value, signaling investors see a chance the company will have to write down assets. Investment bank shares tend to trade at least a small premium to book value, and during the boom years ending in 2007 typically traded at more than twice their book value.

A person familiar with the matter said the Securities and Exchange Commission is looking into whether short-sellers have spread bogus rumors about Lehman to push the company's shares down. Short-sellers profit when a company's shares drop.