Lehman liquidates three funds after taking a $1 billion hit

Mumbai: Lehman Brothers Holdings Inc has liquidated three floundering funds after they lost value and ended up in $1 billion hit on its balance sheet, the investment bank said in a filing with the US Securities and Exchange Commission.

Market disruptions and downgrading by rating agencies of certain investments held by the funds have caused a decline in the fair value of the funds' assets, Lehman said in the filing.

The assets of those funds, with an estimated fair value of $1 billion at the end of February 2008, were purchased by the company and included in its balance sheet. The company also purchased another $800 million in ''deteriorated assets'' from other funds.

Lehman's disclosure comes at a time when losses from subprime and other mortgages have rocked several banks and dealt a blow to their balance sheets.

New York-based Lehman, the fourth largest US investment bank, has formed various private equity or alternative investment funds with third-party investors where it acts as general partner and does not consolidate the funds into its results of the operations.

Lehman said it might provide support to the funds in the form of guarantees, additional capital commitments or the purchase of funds, even though it has no obligation to do so.

Lehman did not specify what types of assets were affected. However, the Wall Street Journal said, citing an unidentified Lehman executive, that the liquidations related to two money-market funds and an enhanced-cash fund.

Lehman said it has agreed to waive or otherwise limit its investment management, advisory or other administrative fees charged to certain funds. Substantially all of the assets consolidated during the 2008 quarter are managed within the company's Capital Markets-Fixed Income business.

Earlier this month, in order to quell speculation that it is short of capital, Lehman said it priced a $4 billion offering of 4 million shares of Non-Cumulative Perpetual Convertible Preferred Stock, Series P, with a par value of $1.00 per share and liquidation preference of $1,000 per share. Each share of the Preferred Stock would be convertible at any time, at the holder's option, into 20.0509 shares of its common stock, representing an initial conversion price of approximately $49.87 per common share, subject to adjustments in certain circumstances. The company said that the proceeds from the offering would be used to strengthen its capital and raise its financial flexibility.

For the recent first quarter, Lehman reported a 57 per cent drop in its profit to $489 million from $1.15 billion in the year-ago period, hurt by negative mark to market adjustments of nearly $2 billion. Net income to common stock fell to $465 million, or $0.81 per share, from $1.13 billion, or $1.96 per share, reported a year ago. Lehman's total revenues were $12.37 billion, down from $13.8 billion in the same quarter of last year.