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Lehman: Running out of options

The battered Wall Street firm says it will announce quarterly results and unveil 'key strategic initiatives' Wednesday morning. But can Lehman raise the capital it needs?

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NEW YORK (CNNMoney.com) -- This story was written by CNNMoney.com writers Tami Luhby and David Ellis and Fortune.com writers Roddy Boyd and Colin Barr.

Beleaguered Wall Street firm Lehman Brothers will unveil "key strategic initiatives" for the firm, along with its expected third-quarter earnings, Wednesday morning before the market opens.

However, it may prove difficult for Lehman to convince investors that it will be able to raise the capital it needs to keep doing business after the 45% plunge in its stock price Tuesday.

The investment bank's shares hit their lowest level in more than 10 years Tuesday as investors grew ever more concerned about the company's future. Earlier in the day, Standard & Poor's placed Lehman (LEH, Fortune 500) on CreditWatch with negative implications.

"The CreditWatch listing stems from heightened uncertainty about Lehman's ability to raise additional capital, based on the precipitous decline in its share price in recent days," said Standard & Poor's credit analyst Scott Sprinzen. "Although the ratings ultimately could be affirmed, we do not currently rule out the possibility of lowering the ratings by more than one notch."

Shares fell early Tuesday morning following a report by Dow Jones that indicated talks between Lehman and Korea Development Bank had ended. It had been widely speculated in recent weeks that the state-run KDB was interested in buying a stake in Lehman.

Lehman closed Tuesday at $7.79, down from $14.15. The company's stock has plunged nearly 88% so far this year due to concerns about its ability to raise much needed capital.

Lehman is expected to post a second straight multibillion-dollar quarterly loss, and is reportedly considering several options to raise capital and reduce its exposure to further mortgage-related losses.

Stuck between a rock and a hard place

While much has been made of Lehman's culture and the resourcefulness of its chief executive, Dick Fuld, there is no denying that the firm is in a spot unlike any other in its history.

In addition to a reported collapse in talks with KDB, a multi-week, highly public quest to get buyers for its Neuberger Berman money management unit has yielded no buyers so far.

Of course, a sale of the Neuberger unit would bring another set of equally vexing problems, given that ratings agencies appear to be placing great importance on its recurring profits and steady cash flows.

Tuesday's utter devastation in Lehman's stock price ended any possibility of a desperation stock sale, no matter how dilutive. With investors certain to demand a sharp discount from the market price, and 694 million shares outstanding, a meaningful capital increase would require a dilution of current suffering shareholders that would leave them with very little.

The Treasury Department's busy weekend, in which it placed mortgage guarantors Freddie Mac and Fannie Mae in a conservatorship, also served to shut down one of the favorite capital sources for troubled financial companies: the preferred security market.

When Treasury suspended dividend payments on $30 billion of Fannie and Freddie preferred stock, investors began to sell preferred stock investments across the finance sector.

Attempts to garner a buyer for the firm's nearly $33 billion in distressed commercial real estate loans and bonds have been ongoing and resulted in nothing.

Nor is selling the pieces individually into the market much of an option, with the commercial mortgage bond markets selling off sharply on a weekly basis, assuring that any sales made lock in large realized losses.

In peddling the commercial real estate block, Lehman's smaller size relative to peers Merrill Lynch (MER, Fortune 500), UBS (UBS) and Citigroup (C, Fortune 500) becomes most apparent. Each of those three firms was able to liquidate disastrous multi-billion dollar portfolios in CDOs and mortgage-backed bonds because they have the balance sheet size to finance the sales to counterparties. Lehman simply does not.  To top of page

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