Financial Sector Gets Lift From Lehman and UBS


After being beaten down for months, the financial sector got a bit of good news on Tuesday.

Lehman Brothers Holdings saw strong demand for its share offering, pushing its stock up sharply and triggering a broad market rally. Meanwhile, a big writedown by UBS convinced some that the worst might be over for the Swiss investment bank.

New York Stock Exchange (NYSE)
Oliver P. Quilla for

That wasn't all. Thornburg Mortgageshares rose after the provider of large residential mortgages said it successfully raised $1.35 billion in a last-ditch effort to avoid bankruptcy,but at a large cost to existing shareholders.

Still, the news wasn't all good. Deutsche Bank more than doubled writedowns in the wake of the global credit crisis, casting a pall over the prospects for the bank that had been seen as little affected by the melt-down.

Lehman said it raised $4 billion of capital after an offering of convertible preferred shares, bolstering its balance sheet and erasing fears that it was facing the same predicament as Bear Stearns , which nearly collapsed two weeks ago.

The financial sector also benefited from news that UBS wrote down an additional $19 billion on U.S. real estate and related assets, in addition to unveiling a massive increase in capital. U.S.-listed shares of UBS surged 12.5 percent to $32.42 on speculation that the bank was wiping its slate clean.

"We're moving away from the credit crisis storm--it's dying down," said David Kelly, chief market strategist with JPMorgan Funds Management. "Now we just have whatever bad economic weather there is. That is much safer territory for Wall Street."

Lehman's shares rose 13.8 percent, as the offering assured the market that the fourth-largest U.S. investment bank had the support of major investors, even after rumors of looming writedowns have drubbed its shares.

"The deal appeared to have gone pretty well. People feel comfortable with Lehman, unlike the situation around Bear Stearns," said Lee Delaporte, director of research at Dreman Value Management.

The convertible preferred share offering soothed investors that are concerned about the global financial sector, after the collapse of Bear Stearns Cos and more than $200 billion of bank writedowns globally for subprime mortgages and other toxic assets.

To be sure, Lehman's convertible preferred share sale is not completely positive for the investment bank.

Lehman Brothers
Bert van Dijk

In addition to the potential increase in outstanding shares, the offering will result in another $290 million of annual dividend payments, thanks to its 7.25 percent dividend yield.

And problems have not dissipated from the banking sector entirely.

Video: watch David Faber's UBS report (2 mins, 58 secs)

Goldman Sachs forecasts that global credit losses could top $1.2 trillion from the current crunch, and that U.S. banks, brokers, hedge funds, and government-sponsored enterprises will suffer roughly $460 million of credit losses.

Ratings agency Fitch changed the medium-term outlook on Lehman's ratings to "negative," noting that with securitization markets still tight, Lehman's earnings could be strained.

Lehman said late Monday the deal was not meant to shore up the bank's balance sheet against write-downs, but was instead meant to show critics that the market still has confidence in the fourth-largest U.S.investment bank.

Questions about potential write-downs at Bear Stearns Cos Inc were enough to trigger a run on the bank there, forcing what was once the fifth-largest U.S.

investment bank to sell itself to JPMorgan Chase & Co for a fraction of its former value.

Rumors of similar trouble at Lehman have dogged the company for weeks, and had pushed the company's shares down 43 percent between the beginning of February and the end of March.