Lehman CFO: Rumors Forced Bank to Raise $4 Billion

Lehman Brothers' chief financial officer told CNBCthat the investment bank was essentially forced to raise $4 billion in capital because of growing rumors that Lehman was facing the same kind of liquidity problems that brought down Bear Stearns.

“Unfortunately, we’re in a market where perception trumps reality,” Lehman Brothers Chief Financial Officer Erin Callan said in a live interview.

Lehman Brothers
Bert van Dijk
Lehman Brothers

This is an industrywide problem, Callan said, but last week, “we, in particular came under the white hot lights around rumors and suppositions with respect to the strength of our firm.”

“We didn’t want to wait for it to get to a point where we were in a wholly defensive mode,” Callan said. “We felt it was necessary to make a strong statement.”

Lehman raised $4 billion of capital Tuesday in a deal that could boost Lehman's outstanding share count by about 15 percent, but could also stop questions about the investment bank's stability.

Callan said the firm was careful to make sure how the deal was distributed -- that the stock wasn't going to investors who would take a short position or bet against it.

As for the dilution for existing shareholders, Callan said she thinks that the stock's performance today endorses their view that "the dilution concern is minor relative to confidence in the organization.”

Lehman's shares rose 10.2 percent, as the offering assured the market that the fourth-largest U.S. investment bank had the support of major investors.

"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.

Lehman's convertible preferred share sale is not completely positive for the investment bank -- in addition to the potential increase in outstanding shares, it will result in another $290 million of annual dividend payments, thanks to its 7.25 percent dividend yield.

"You don't want to have to pay 7.25 percent for capital, but in this market environment, it made a lot of sense to do this deal," Delaporte said.

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 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 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.

Lehman has said in the past that it suspects that short sellers, who profit when share prices fall, were spreading rumors about the company to push its stock down. (Video: The effect of short selling on Lehman)

A source on Monday said the U.S. Securities and Exchange Commission was probing whether short-sellers have spread bogus rumors about Lehman to push its shares lower.

Lehman said the convertible preferred securities were priced with a dividend yield of 7.25 percent and their principal can be used to buy common shares at $49.87, or a 32.49 percent premium to their closing price Monday.

Lehman's shares rose $3.85 percent to $41.49 on the New York Stock Exchange in morning trading.