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Lehman Brothers shares tumbled Monday after the investment bank revealed it would raise $6 billion through a stock issuance to bolster its capital base after losses from trading and hedging resulted in an expected $2.77 billion second-quarter loss for the investment bank.
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CNBC.com |
"I'm very disappointed in this quarter's results," said Chairman and Chief Executive Richard Fuld, in a written statement.
The loss would be Lehman's first since it was spun off from American Express in 1994, and it was much worse than Wall Street was expecting.
Shares of Lehman [LEH
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], the fourth largest investment bank, sank more than 12 percent in early morning trading.
Lehman plans to raise $4 billion by offering 143 million shares of common stock at $28 a piece, expanding the bank's shares outstanding by 25 percent. The company is also selling $2 billion in preferred shares that will carry an 8.75 percent yield and be convertible into common stock in a price range between $28 and $33 each.
The sales should be completed Thursday.
Lehman's stock had been volatile in recent trading sessions as questions about its liquidity swirled around it. Concerns about Lehman's health had frequently surfaced ever since the collapse of Bear Stearns, which was acquired at the end of May by JPMorgan Chase [JPM
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].
All told, financial institutions globally have written down more than $350 billion of assets, and raised more than $200 billion of capital, amid the widening credit crisis, Reuters reported.
Investors remain concerned about whether the past write downs are sufficient or if more will be on the horizon.
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Matt McCormick, an analyst at Bahl & Gaynor Investment Counsel in Cincinnati, told Reuters, "They're going to have to find ways to assuage concerns there aren't more write-downs coming. Continued capital raises do not imply strength."
Lehman said it expects its loss for the quarter ended May 31 to be $5.14 a share, compared with earnings of $489 million, or 81 cents a share, in the year-ago period.
Net revenue is expected to be negative $668 million, compared with positive $5.51 billion a year earlier, Lehman said.
The company said it reduced gross leverage to below 25 times from 31.7 times at the end of its first quarter. It said it has also cut exposure to residential mortgages, commercial mortgages and real estate investments 15 percent to 20 percent each.
Lehman said it expects to announce full second-quarter results on June 16.
David Einhorn, of hedge fund Greenlight Capital, which has sold shares of Lehman short in a bet they will decline, told CNBC's "Squawk Box" that he wonders if Lehman is raising enough money to fix its problems.
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"It's hard to say," Einhorn said. "First, you have to back up, and realize that Lehman is raising capital that it said it didn't need....They're doing it to replace losses that it previously said that it didn't have, so the question is, is it enough, or did they get all of the losses? There's a few things you can see from the press release this morning that already suggest that they didn't really take the full...magnitude of the hit."
Fitch Cuts Ratings
On the news, Fitch Ratings cut its credit ratings on Lehman and Moody's Investors Service changed its outlook to negative, indicating a rating cut is likely.
The move follows a downgrade of Lehman last week by Standard & Poor's, as part of a sector review of financial companies taking into account liquidity pressures in the industry.
Fitch cited increased volatility in Lehman's earnings as a reason for the downgrade, in addition to changes in its business mix due to the contraction in the securitization markets and challenges in its hedging effectiveness.
Fitch cut Lehman's long-term issuer default rating one notch to "A-plus," the fifth-highest investment grade, from "AA-minus" and cut Lehman's short-term issuer default rating one notch to "F1," the second-highest rating, from "F1-plus."
The outlook is negative, indicating an additional rating cut is more likely over the next one to two years.
Meanwhile, Moody's said that despite tough market conditions, Lehman's core customer-flow franchises continue to produce solid revenues, with profits generated from outside of fixed income helping to counter current weakness in residential and commercial real estate and leveraged lending.
Moody's affirmed Lehman's senior debt rating at "A1," the fifth-highest investment grade, but changed the outlook to negative, from stable, meaning the rating may move downward over the next 12 to 18 months, but the agency is not actively considering a downgrade.
Moody's said it welcomed Lehman's plans to raise $6 billion in capital as a positive step both to repair its balance sheet and to boost investor confidence. But it had concerns over risk management decisions that led to losses on hedges.
-AP and Reuters contributed to this report.
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