June 4, 2008 / 1:33 AM / 11 years ago

Market breathes sigh of relief on Lehman rally

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

The comments helped staunch 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.

But 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 $31.40.

Lehman’s market cap had fallen to just short of $17 billion at the close of trade on Tuesday, after sliding 18 percent over three days. The company is now worth roughly a third of its peak value just north of $45 billion back in February 2007.

Merrill Lynch upgraded Lehman to a “buy” with a price objective of $37 on Wednesday. Guy Moszkowski and M. Patrick Davitt, analysts at Merrill, said Lehman shares were oversold.

Lehman shares have “meaningfully undershot fair value in the last few days on speculation and concerns that are not justified, in our opinion, given access to the (Federal Reserve) primary dealer facility and ample liquidity,” they said in a report.

“Also, we believe concerns of a ‘Bear-like’ event at Lehman are unfounded as Lehman is not subject to the same funding risk at Bear Stearns.”

The shares also got a brief boost after CNBC reported that Lehman was open to talking to private equity firms about a capital infusion, though there had been no such talks as of yet.

Since the collapse of Bear Stearns, investors have fretted that Lehman would face a similar fate, leaving its shares under severe selling pressure. Lehman’s stock had tumbled 18 percent over the past three trading days.

The bank has been under deeper scrutiny in recent weeks as David Einhorn, whose $6 billion hedge fund Greenlight Capital is shorting Lehman shares, accused the bank of low-balling write-downs. Last month he argued it needed to raise capital.

But Wednesday, the market was on Lehman’s side.

In addition to the Merrill upgrade and Fuss’ recent purchase, Lazard Ltd (LAZ.N) Chief Executive Bruce Wasserstein also told Reuters that he trusts Lehman CEO Richard Fuld to get the embattled investment bank through the market’s current crisis.

“Dick Fuld is very able,” Wasserstein told Reuters before speaking at a Wall Street Journal breakfast panel.

Slideshow (4 Images)

Peters, the head of fixed-income research and economics at Morgan Stanley, also poured cold water on repeat of the Bear Stearns scenario.

“The advent of the various Fed liquidity facilities make it much more difficult for a broker/dealer to have a so-called run on the bank,” he said. “This is not to say that business and revenues will not be negatively affected by all this negative press.”

All told, “it is extremely difficult to have a Bear Stearns-type of event given the Fed’s proactiveness,” Peters added.

Additional reporting by Paritosh Bansal, Joseph A. Giannone and Dena Aubin; Editing by Leslie Adler

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