NEW YORK (Reuters) - Lehman Brothers Holdings Inc LEH.N shares sank 45 percent on Tuesday on growing concern the fourth-largest Wall Street investment bank won’t raise sufficient capital to survive the global credit crisis.
“This has been going on for a while now, and people are worried about liquidity, survival,” said Rose Grant, a portfolio manager at Eastern Investment Advisors in Boston, which invests $1.8 billion and has never owned Lehman shares.
In a sign of the deepening concern over Lehman’s stability, several major Wall Street rivals issued statements that they were still trading with Lehman.
The stock closed down $6.36 at $7.79 on the New York Stock Exchange, and touched its lowest level since October 1998. The slide wiped out $4.4 billion in market value, and was a factor in broad declines in major U.S. stock indexes. Prices of safe-haven U.S. Treasuries rose.
Investors are worried that Lehman Chief Executive Richard Fuld may fail to raise enough capital to keep the company operating as losses mount from soured mortgages.
The bank has been reviewing options for the Neuberger & Berman asset management unit, one of its healthier businesses. Analysts have said Neuberger could fetch $7 billion to $8 billion in a sale, and expect a spin-off or disposal of much of its commercial real estate portfolio.
“It’s Bear Stearns redux,” said Greg Salvaggio, a currency trader at Tempus Consulting, referring to the collapse of the Wall Street investment bank in March.
Unlike Bear, which made senior executives available for interviews in the days leading up to its collapse, Lehman has declined several times to comment on its problems, and on Tuesday did so again.
Tuesday’s decline came after Dow Jones Newswires reported that talks on a possible investment from Korea Development Bank broke down, citing the chairman of South Korea’s top securities regulator, Jun Kwang-woo.
A spokesman for the Korean regulator denied the report, telling Reuters that Jun never made the statement.
The Dow article also quoted an unnamed government official as saying KDB had decided not to invest in Lehman.
The U.S. Federal Reserve and Securities and Exchange Commission declined comment. A U.S. Treasury Department spokeswoman said officials stay in touch with Wall Street on a regular basis. NYSE Regulation spokesman Scott Peterson said the exchange was monitoring trading in Lehman shares closely.
Standard & Poor’s said it may cut Lehman’s “single-A” long-term credit rating, its fifth-lowest investment grade. It cited “heightened uncertainty” about the bank’s ability to raise capital as its shares fall. It said a downgrade could be more than one notch.
Through the close, Lehman shares had fallen 89 percent from a 52-week high of $67.73, set last Nov 14. Tuesday’s slide raised the specter of government intervention to support Lehman, several investors and analysts said.
Lehman shares rose 8 cents to $7.87 in after-hours trading after Citigroup Inc (C.N), Credit Suisse Group AG CSGN.VX, Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N) all said they were still trading with Lehman.
Bear collapsed in March after its trading partners stopped doing business with it, triggering the equivalent of a bank run. JPMorgan Chase & Co (JPM.N) later acquired Bear.
“They do need to open up and really give some reassurance, show where the capital is, and what they are doing and that they are solid,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co, referring to Lehman. “There’s no mercy on Wall Street once they lose confidence in you.”
Shares of other U.S. financial companies heavily exposed to mortgages also fell on Tuesday. Insurer American International Group Inc (AIG.N) slid 19 percent, and Washington Mutual Inc (WM.N), the largest savings and loan, dropped 20 percent.
S&P cut its outlook on Washington Mutual’s “BBB-minus” credit rating, which is one notch above “junk,” to “negative.”
Lehman had a second-quarter loss of $2.8 billion, or $5.14 per share. Analysts, on average, expect a third-quarter loss of $3.04 per share, according to Reuters Estimates.
Sean Egan, managing director at Egan-Jones Ratings Co in Haverford, Pennsylvania, said Lehman may have limited options to raise capital.
“There are relatively few parties who have the ability to move quickly to help shore up Lehman Brothers’ credit quality,” he said. “Unfortunately, Lehman has to move rapidly to calm counterparty concerns.”
On Monday, Lehman said it expected to report third-results and discuss “key strategic initiatives” on September 18.
But Citigroup analyst Prashant Bhatia wrote Tuesday that Lehman might announce the quarterly results as soon as Tuesday because of downward pressure on its shares.
The cost of protecting Lehman debt with credit default swaps rose to 490 basis points, or $490,000 annually for five years to protect $10 million of debt, from 327 basis points Monday, according to John Atkins, an analyst at IDEAglobal in New York.
Prominent banking analyst Richard Bove at Ladenburg Thalmann & Co said a weekend management overhaul at Lehman, including departures of its fixed-income chief and a top international executive, signaled that talks on raising capital weren’t going well.
“People simply made the decision that they didn’t want to be anywhere near this company because management was no longer in control of what was in the best interest of shareholders,” he said.
Additional reporting by Dena Aubin, Paritosh Bansal, Elinor Comlay, Joseph A. Giannone, Steven C. Johnson, Juan Lagorio and Richard Leong, Lucia Mutikani, Vivianne Rodrigues and Jonathan Spicer in New York; David Lawder and Rachelle Younglai in Washington, and Kim Yeon-hee in Seoul; Editing by John Wallace/Jeffrey Benkoe