(Bloomberg) -- Lehman Brothers Holdings Inc. reported a $2.8 billion second-quarter loss, the company's first since going public in 1994, and raised $6 billion to help it survive the collapse of the mortgage market.
The fourth-largest U.S. securities firm fell as much as 12 percent in New York trading after selling common and preferred shares at a price 13 percent below the close on June 6. The New York-based company sold about $130 billion of assets in the quarter and cut mortgage-related holdings and leveraged loans by as much as 35 percent.
Chief Executive Officer Richard Fuld, who said he was ``very disappointed'' with the results, is adding to the $8 billion he raised since February to quell concern that the global credit-market contraction would bring his firm down. Banks and brokerages have raised more than $285 billion to make up for almost $390 billion in writedowns and credit losses since the start of last year.
``It's kind of sobering for people who have been listening to the company these last six to nine months that they had everything under control,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``It shows that the market continues to be difficult. I would say Lehman's probably not the only broker that has these kinds of pressures.''
Lehman dropped $3.52 to $28.77 at 9:47 a.m. in composite trading on the New York Stock Exchange, and fell to as low as $28.50. The stock is the worst performer this year in the 11- company Amex Securities Broker/Dealer Index.
Common and Preferred
The share sale included $4 billion of common stock priced at $28 apiece and $2 billion of preferred stock that converts to common shares in three years. The sale was oversubscribed in New York, people close to the firm said.
The discounted share offering ``is the least-good option,'' Douglas Ciocca, a portfolio manager at Renaissance Financial Corp. in Leawood, Kansas, said in an interview with Bloomberg television. ``I would have rather seen more committed capital with a significant discount.''
Lehman had been talking to at least one U.S. pension fund and an overseas investor about taking a stake in the company, a person with knowledge of the matter said last week.
``They've got to start thinking about selling a strategic stake or selling the firm because there's just not enough business to go around,'' Hendler at CreditSights said.
Rating Changes
Moody's Investors Service changed its rating outlook on Lehman to negative after the announcement, saying ``the newly revealed vulnerability of the secured funding model may warrant negative rating action on Lehman and on other independent investment banks.''
Moody's rates Lehman A1. Standard & Poor's cut its rating on Lehman to A from A+ last week.
Lehman had $3.7 billion of writedowns on its portfolio of mortgage-related assets and leveraged loans during the quarter as hedges against the positions lost money, the bank said. Cash holdings increased to $45 billion from $34 billion at the end of the first quarter, Lehman said.
All of the figures were preliminary, with final results for the three months ended May 31 set for release on June 16.
Revenue was wiped out by the writedowns, which cut fixed- income results to negative $3 billion. Equity trading dropped 65 percent to $600 million, investment-banking fell 25 percent to $900 million, and asset-management rose 13 percent to $900 million.
Merrill, Morgan Stanley
Even after doubling its writedowns on mortgage-related assets in the quarter, Lehman's losses are still smaller than those of rivals including New York-based Merrill Lynch & Co., which has written down $37 billion. Morgan Stanley, the second- biggest U.S. securities firm, wrote down $12.6 billion.
Credit rating downgrades on bond insurers last week may prompt Merrill, Citigroup Inc. and UBS AG to record another $10 billion of writedowns on mortgage assets insured by those companies, Oppenheimer & Co. analyst Meredith Whitney said in a report today.
Lehman has dropped 56 percent this year as concern about the deteriorating value of mortgage securities pushed Bear Stearns Cos., Lehman's smaller rival, to the brink of bankruptcy. Bear Stearns agreed to be acquired by JPMorgan Chase & Co. in March and the Federal Reserve stepped in to finance some of Bear Stearns's assets and provide other securities firms with emergency loans.
Bear Stearns
Since the collapse of Bear Stearns, Lehman has been reducing its ratio of assets to equity, known as its leverage ratio. The ratio fell to 25 from 32 in the first quarter, the company said today. Chief Financial Officer Erin Callan said in an April interview that March had been a ``very, very tough month'' and that derivatives used to hedge cash securities diverged widely from their usual levels.
Last month analysts including William Tanona at Goldman Sachs Group Inc. started cutting their estimates for Lehman's second-quarter earnings to a loss instead of a profit, in part because of losses incurred on the hedges.
``What's been good for all the banks as they write down these assets is that when they wanted capital, it's been available,'' Peter Goldman, a managing director at Chicago Asset Management, which oversees about $500 million and doesn't hold Lehman stock, said last week.
The fourth-largest U.S. securities firm fell as much as 12 percent in New York trading after selling common and preferred shares at a price 13 percent below the close on June 6. The New York-based company sold about $130 billion of assets in the quarter and cut mortgage-related holdings and leveraged loans by as much as 35 percent.
Chief Executive Officer Richard Fuld, who said he was ``very disappointed'' with the results, is adding to the $8 billion he raised since February to quell concern that the global credit-market contraction would bring his firm down. Banks and brokerages have raised more than $285 billion to make up for almost $390 billion in writedowns and credit losses since the start of last year.
``It's kind of sobering for people who have been listening to the company these last six to nine months that they had everything under control,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``It shows that the market continues to be difficult. I would say Lehman's probably not the only broker that has these kinds of pressures.''
Lehman dropped $3.52 to $28.77 at 9:47 a.m. in composite trading on the New York Stock Exchange, and fell to as low as $28.50. The stock is the worst performer this year in the 11- company Amex Securities Broker/Dealer Index.
Common and Preferred
The share sale included $4 billion of common stock priced at $28 apiece and $2 billion of preferred stock that converts to common shares in three years. The sale was oversubscribed in New York, people close to the firm said.
The discounted share offering ``is the least-good option,'' Douglas Ciocca, a portfolio manager at Renaissance Financial Corp. in Leawood, Kansas, said in an interview with Bloomberg television. ``I would have rather seen more committed capital with a significant discount.''
Lehman had been talking to at least one U.S. pension fund and an overseas investor about taking a stake in the company, a person with knowledge of the matter said last week.
``They've got to start thinking about selling a strategic stake or selling the firm because there's just not enough business to go around,'' Hendler at CreditSights said.
Rating Changes
Moody's Investors Service changed its rating outlook on Lehman to negative after the announcement, saying ``the newly revealed vulnerability of the secured funding model may warrant negative rating action on Lehman and on other independent investment banks.''
Moody's rates Lehman A1. Standard & Poor's cut its rating on Lehman to A from A+ last week.
Lehman had $3.7 billion of writedowns on its portfolio of mortgage-related assets and leveraged loans during the quarter as hedges against the positions lost money, the bank said. Cash holdings increased to $45 billion from $34 billion at the end of the first quarter, Lehman said.
All of the figures were preliminary, with final results for the three months ended May 31 set for release on June 16.
Revenue was wiped out by the writedowns, which cut fixed- income results to negative $3 billion. Equity trading dropped 65 percent to $600 million, investment-banking fell 25 percent to $900 million, and asset-management rose 13 percent to $900 million.
Merrill, Morgan Stanley
Even after doubling its writedowns on mortgage-related assets in the quarter, Lehman's losses are still smaller than those of rivals including New York-based Merrill Lynch & Co., which has written down $37 billion. Morgan Stanley, the second- biggest U.S. securities firm, wrote down $12.6 billion.
Credit rating downgrades on bond insurers last week may prompt Merrill, Citigroup Inc. and UBS AG to record another $10 billion of writedowns on mortgage assets insured by those companies, Oppenheimer & Co. analyst Meredith Whitney said in a report today.
Lehman has dropped 56 percent this year as concern about the deteriorating value of mortgage securities pushed Bear Stearns Cos., Lehman's smaller rival, to the brink of bankruptcy. Bear Stearns agreed to be acquired by JPMorgan Chase & Co. in March and the Federal Reserve stepped in to finance some of Bear Stearns's assets and provide other securities firms with emergency loans.
Bear Stearns
Since the collapse of Bear Stearns, Lehman has been reducing its ratio of assets to equity, known as its leverage ratio. The ratio fell to 25 from 32 in the first quarter, the company said today. Chief Financial Officer Erin Callan said in an April interview that March had been a ``very, very tough month'' and that derivatives used to hedge cash securities diverged widely from their usual levels.
Last month analysts including William Tanona at Goldman Sachs Group Inc. started cutting their estimates for Lehman's second-quarter earnings to a loss instead of a profit, in part because of losses incurred on the hedges.
``What's been good for all the banks as they write down these assets is that when they wanted capital, it's been available,'' Peter Goldman, a managing director at Chicago Asset Management, which oversees about $500 million and doesn't hold Lehman stock, said last week.
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