Merrill cuts Lehman rating a week after upgrade

NEW YORK (Reuters) - Merrill Lynch downgraded its rating on Lehman Brothers Holdings Inc LEH.N to "neutral" from "buy" on Wednesday, just a week after upgrading the stock, and Lehman shares fell 8.4 percent.

Merrill analysts Guy Moszkowski and Patrick Davitt lowered their price target to $28 from $36, saying Lehman's "business mix is poor for this environment," according to a research note obtained by Reuters.

Lehman's shares, which were already down after a report that it may look to raise more capital and amid a broader decline in financial stocks, fell to $2.33 to $25.17 in afternoon trading on the New York Stock Exchange. The stock fell as low as $24.97 during the session.

"Clearly we don't like removing the Buy rating just a week after putting it in place, and at a price 10% lower," the Merrill analysts wrote. "But it seems clear to us now that the move to Buy was premature."

Merrill based its previous call on valuation, saying the stock had overcorrected to the downside and had also accounted for any likely capital raise.

On Monday, 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.

In their latest note, Merrill analysts said the scale of the second-quarter loss and capital-raising indicated lower potential return on equity and lower confidence.

Lehman's real-estate exposures remained large, and there was "considerable potential for further marks," the research note said.

But Moszkowski and Davitt said they expected the brokerage would survive because of a strong liquidity position and access to the Federal Reserve discount window.

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

(Reporting by Paritosh Bansal and Dan Wilchins; editing by Jeffrey Benkoe)