Lehman posts $2.8 billion loss

Wall Street firm reports first loss since going public, adds it will raise $6 billion in capital through stock sale, sending shares tumbling.

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By David Ellis, CNNMoney.com staff writer

This year, my family finances are ...
  • Better than ever
  • Managing to get by
  • Struggling to keep up
  • In very bad shape

NEW YORK (CNNMoney.com) -- Lehman Brothers confirmed Monday much of the speculation that has swirled around the Wall Street firm in recent days, booking a $2.8 billion loss and announcing plans to raise $6 billion in fresh capital by selling stock.

The announcements, which was largely aimed at dispelling fears about the underlying health of the firm, did little to soothe nervous investors, however, as Lehman (LEH, Fortune 500) shares down more than 9% in afternoon trade.

"It is hard to see the positives," wrote analyst Jeff Harte, who covers Lehman and other financial services firms for Sandler O'Neill & Partners, in a research note Monday.

Maybe the biggest surprise was the magnitude of the loss that Lehman suffered. Announcing its preliminary results a week ahead of schedule, the company said it expected to report a loss of $5.14 per share, during the second quarter - its first quarterly loss since the firm went public in 1994.

Analysts had been expecting the company to report a loss of 22 cents a share on revenue of $2.62 billion, according to analysts surveyed by earnings tracker Thomson Reuters.

Lehman Chairman and CEO Richard Fuld Jr. said he was "very disappointed" in the firm's quarterly results, but added that attempts to strengthen the company's balance sheet and improvements in the markets since March have the firm "well positioned."

While the company was dinged by sluggish investment banking activity and a sharp slowdown in its fixed income business, Lehman's biggest problems were hedging strategies that backfired and a series of writedowns on the company's mortgage portfolio.

Lehman took the writedowns so it could reduce exposure to the most troubled assets on its balance sheet. Doing this became more crucial, but also more challenging, following the March collapse of Bear Stearns.

That made it more difficult to fetch a fair price for the residential and commercial real estate assets it sold, said Lehman chief financial officer Erin Callan in a conference call with analysts Monday morning.

The grisly results prompted the credit rating agency Moody's to cut its outlook for Lehman to "negative" from "stable." Fitch Ratings followed by downgrading Lehman's debt rating.

These cuts came just a week after the company got caught up in Standard & Poor's sweeping downgrade of the banking and brokerage sector, which sent shares of Lehman, among others, reeling.

A capital plan

The New York City-based investment bank also said it would raise $6 billion in capital. Two-thirds would come from the sale of common stock at an implied price of about $28 a share, a 13% discount to Friday's closing price of $32.29, according to a company filing. The remaining amount would be raised through the sale of preferred stock.

Lehman had reportedly lined up commitments from several investors, including the New Jersey Division of Investment, which manages the state's pension fund, The Wall Street Journal reported late Sunday. The paper said a sizeable foreign investment also remained a possibility, but the firm did not provide any details about potential investors.

Callan said the bigger-than-expected fundraising, which adds to the $4 billion the company collected through a convertible stock sale in April, leaves Lehman "extremely well capitalized" to take advantage of some of the current opportunities in the market.

Rumor troubles

Last week, Lehman found itself in the center of a rumor maelstrom. At first, there were reports that the 158-year old firm would have to raise as much as $4 billion of dollars in capital to deal with an expected loss in the second quarter.

Hedge fund manager David Einhorn of Greenlight Capital made headlines after he questioned the company's accounting, saying it hadn't reserved for losses on its portfolio of collateralized debt obligations.

There was also talk that the company may have to sell part or even all of itself to another financial firm. The only instance in which the company responded was amid rumors that it tapped the Fed's lending facility for emergency borrowing, saying it hadn't borrowed from the central bank since mid-April.

By Friday, Lehman stock had fallen about 12% from the beginning of last week. Over the past month, Lehman shares have lost nearly a third of their value.

A cleaner balance sheet?

During Monday's conference call, Callan provided a detailed view of the firm's holdings and its liquidity position and took pains to draw distinctions between Lehman and Bear Stearns.

While more details are expected when the company officially release its results on June 16, the company said it grew its liquidity pool grew to $45 billion from $34 billion from the first quarter.

Lehman said it also cleared up some trouble spots in its portfolio. The company it shrank its leverage loan portfolio by about 35% and its non-investment grade inventory by 20%.

At the same time, Lehman said it reduced its exposure to residential and commercial mortgages and real estate investments by as much as 20%. Callan said the assets that were sold tended to be riskier assets and had plenty of interested buyers.  To top of page

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