Lehman Brothers may raise additional $5 billion in capital

07 Jun 2008

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The ongoing financial crisis has pared off so much value from financial institutons' assets that they seem to be on a continuous run to raise capital to carry on day-to-day operations.

Even after raising as much as $4 billion not even two months back by way of a sale of convertible preferred shares to quell speculation it was short of capital, New York-based investment banker Lehman Brothers is reportedly looking to raise $5 billion to ensure that it is more than adequately capitalised, as it tries to fend off concerns that it might be in for a Bear Stearns-type meltdown.

In such a move as continually raising capital, Lehman joins peers like Citigroup whose figures are much higher. (See: Citigroup stake sale fetches $4.5 billion; exceeds target by 50 per cent)

Considering that the Wall Street giant has already raised more than $8 billion this year by selling bonds and preferred shares, the latest news comes somewhat as a surprise. With this exercise, Lehman CEO Richard Fuld is reportedly trying to reduce leverage, the firm's ratio of assets to equity, to help offset a decline in the value of debt securities.

Although Lehman is in a much stronger financial position than its failed Wall Street compatriot, Bear Stearns, it still has to contend with Wall Street's perception of how much risk it may have on its books. A failure of counterparty trust was the main thing that drove Bear Stearns into bankruptcy and its eventual takeover by JPMorgan Chase in March.

Executives at Lehman are negotiating with at least one US pension fund and an overseas investor for the aforementioned funds. However, details have not been disclosed nor the news made official, with spokespeople for the fourth-largest US securities firm refusing comment.

News reports have also said that the bank may move up its second quarter report by a week so that it can make its successful fund-raising announcement at the same time as it reports what is expected to be its first-ever loss since going public in 1994.

Lehman fell $1.56, or 4.6 per cent, to $32.29 in late composite trading on the New York Stock Exchange. The stock has dropped 51 per cent this year as the company grapples with the decline of the mortgage and structured credit business. Weak demand for high-yield loans and debt securities backed by real estate has forced firms including Citigroup Inc. and Merrill Lynch & Co. to post record losses.

Earlier this week ratings agency Standard & Poor's cut its assessment of Lehman's creditworthiness one level to A from A+ and said the outlook remains negative, noting that a downgrade would be possible if the firm were to incur ''substantial losses.'' (See: S&P cuts Morgan Stanley, Lehman Brothers, and Merrill Lynch ratings, spares Goldman Sachs)

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