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Lehman Tries to Quash Talk by Raising $3 Billion (2008)

By Jenny Anderson April 1, 2008

Lehman Brothers raised $3 billion on Monday in an effort to quiet talk on Wall Street that it might be the next investment bank to run into trouble.

Unlike some other Wall Street banks, which have gone cap in hand to wealthy foreign governments, Lehman turned to American institutions. The firm, headed by Richard S. Fuld Jr., announced after the markets closed that it had raised the money by selling new convertible preferred shares. It did not name the buyers.

Lehman, the nation’s fourth-largest securities firm, has been on a roller coaster since the credit market seized up last summer. Since the near collapse of Bear Stearns two weeks ago, Lehman has been whipsawed by rumors that it might stumble too. Its shares are down 42 percent since the end of last July, compared with a 34 percent drop at other brokerage firms, according to the XBD broker/dealer index.

Referring to the sale, Lehman’s chief financial officer, Erin M. Callan, said, “We did it for several reasons — investor demand, it gave us the opportunity to deleverage faster and it provides us with dry powder to take advantage of some of the opportunities in the market.”

Lehman has always had a band of loyal followers — and a crowd of critics. But the naysayers gained the upper hand in recent weeks after what amounted to a bank run at Bear Stearns and that firm’s subsequent sale to JPMorgan Chase.

Regulators like Christopher Cox, chairman of the Securities and Exchange Commission, attributed troubles at Bear to a lack of confidence, not capital, leaving open the possibility that other banks could fall prey to a similar crisis of confidence.

In a letter to Nout Wellink, chairman of the Basel Committee on Banking Supervision, Mr. Cox said, “When the tumult began last week, and at all times until its agreement to be acquired by JPMorgan during the weekend, the firm had a capital cushion well above what is required to meet supervisory standards calculated using the Basel II standard.”

Richard S. Fuld Jr., the chief executive of Lehman Brothers
Richard S. Fuld Jr., the chief executive of Lehman BrothersCredit…Richard Perry/The New York Times

For Lehman, the crisis in confidence peaked on March 17, when its share price opened the day down 35 percent on speculation that it could face a similar fate as Bear Stearns. But on March 18, Lehman announced its first-quarter earnings and said it had $30 billion worth of cash and $64 billion in securities that could be turned into cash. Shares soared 46 percent.

In a note on March 17, James Mitchell, an analyst at the Buckingham Research Group, examined the liquidity positions of all the major brokerage firms and concluded that Lehman had come out ahead. Total liquidity, cash, other liquid assets and the borrowing value of unencumbered assets at Bear Stearns was $35 billion, which as a percentage of total assets, was only 9 percent, he said. That was the lowest in the group. In contrast, Lehman had the highest percentage of liquidity, at 25 percent of total assets, he wrote.

But investors remain unnerved by Lehman’s valuing of so-called level three assets, for which there is not an observable market price. Those assets more than doubled in the last six months of last year, rising to $42 billion.

The investment bank wrote down $1.8 billion, net of hedges, in the first quarter, on mortgage-related securities. But critics believed the number should have been higher. Lehman has $39 billion in commercial real estate assets and $37 billion in residential mortgages. Both businesses have been hurt in recent months.

A person briefed on the pricing of Lehman’s convertible shares said the securities would pay a 7 to 7.5 percent yield and the shares would be convertible into common stock at about $50, a premium of about 33 percent.

Lehman Sues Japanese Firm

Lehman Brothers filed suit against the Japanese trading house Marubeni Corporation on Monday, claiming it had been swindled out of $352 million.

Lehman charges that Marubeni staff members were responsible for the swindle, which a source with direct knowledge of the matter said involved forged documents and an impostor at Marubeni’s offices.

Lehman says it also took appropriate reserves in the first quarter. The investment bank also said it had insurance coverage to offset any damage from the loss.

Source : https://www.nytimes.com/2008/04/01/business/01lehman.html