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Lehman Brothers will raise $6 billion of capital to cover $2.8 billion second-quarter loss

Lehman Brothers will raise $6 billion of capital to cover $2.8 billion second-quarter loss

Lehman Brothers Holdings Inc. on Monday said it will raise $6 billion in new capital to shore up its balance sheet after saying it expects to post an unexpectedly large second-quarter loss of nearly $3 billion.
Shares of the fourth-largest U.S. investment bank fell about 9 percent amid mounting concerns about its exposure to the mortgage market. Analysts were quick to react to Lehman's announcement, with credit rating agency Moody's Investors Service lowering its outlook on the firm.
Lehman said it sold about $130 billion of assets during the quarter, and reduced mortgage-related assets and leveraged loans by about 20 percent. However, it still expects to lose $2.87 billion, or $5.14 per share, for the period ended May 31 _ down from the $1.3 billion, or $2.21 per share, it made in the year-ago period.
This marks the first loss for Lehman Brothers since it was spun off from American Express Co. in 1994, and makes Lehman the latest financial institution to show continued pain from the global credit crisis. Analysts had expected the company to report a loss of just 22 cents per share for the period, according to Thomson Financial.
Richard Fuld, Lehman's chief executive, said he was "very disappointed" in the quarterly results. However, he believes the additional capital _ raised through an offering to yet unnamed investors _ will help keep the company whole amid continued market turmoil.
"Notwithstanding the solid underlying performance of our client franchise, we had our first-ever quarterly loss as a public company," Fuld said in a statement.
Lehman Brothers, which plans to release full details of its quarterly results on June 16, said it expects revenue to be negative $668 million compared to $5.51 billion a year earlier. Revenue during the quarter suffered from "negative mark to market adjustments and principal trading losses." Like other investment banks, Lehman has been forced to write down the value of investments in mortgage-backed securities that have suffered in the past year.
Chief Financial Officer Erin Callan said on a conference call Monday the investment bank has logged $17 billion in gross mark-to-market adjustments, or the loss in the value of an asset and losses from its own trading activities, since the beginning of last year. Most of that amount was related to residential mortgages.
Meanwhile, she said Lehman's investments to hedge against troubled investments on its books backfired, and were "significanty impacted" during the past few months. Callan also said the firm is finished de-levering its balance sheet, and can now take more risks in the market.
Global financial institutions have in the past year written down almost $250 billion from mortgage-backed securities and other risky bets.
"The results were far worse than anyone had anticipated," said Goldman Sachs analyst William Tanona in a report to clients. "Results were plagued by continued write-downs and ineffective hedges."
There had been market speculation that Lehman Brothers was seeking outside investors to offset losses during the quarter and fortify its balance sheet. Some analysts felt the firm's balance sheet was the closest of all the Wall Street firms to Bear Stearns, which narrowly avoided bankruptcy in March through its sale to JPMorgan Chase & Co.
Since the collapse of Bear Stearns, Lehman has been reducing its ratio of assets to equity, known as its leverage ratio. The company also ended the first quarter with liquidity of $34 billion and finished the second quarter well above $40 billion.
Lehman is expected to raise capital through mostly American investors through $4 billion of new common shares and $2 billion of 3-year mandatory convertible preferred stock. There have been reports that the New Jersey Division of Investment _ which manages the state's $80 billion of pension funds _ will be among the investors.
While analysts appeared to be satisfied by the fresh capital, there were concerns about how steep Lehman's losses were.
Moody's Investors Service changed its rating outlook on the company to "negative" from "stable" after Monday's announcements amid concerns about risk management.
The ratings agency said any additional firm-wide losses in coming quarters "would raise serious concerns about the effectiveness of Lehman's risk management and may create additional market unease about the firm, potentially weakening its franchise."
Its shares fell $2.92 to $29.37 in midday trading Monday. The stock has fallen about 50 percent so far this year.
As of March 31, Lehman had about 553.6 million shares outstanding. The common stock offering would add about 142.9 million shares, while the conversion on the preferred stock would eventually add as many as 71.4 million more shares.


Updated : 2021-01-17 11:28 GMT+08:00