Lehman to Raise $6 Billion; Expects $2.8 Billion Loss in Q2
Seeking to quell investor and market speculation about its future, Lehman Brothers Holdings Inc. (LEH) said before market open on Monday morning that it expected to post a $2.8 billion loss for the second quarter as it struggles with the continued collapse of the private-party mortgage securities market, the securities firm's first-ever quarterly loss as a publicly-traded company. The embattled Wall Street bank also said it would raise $6 billion, in an effort to shore up its capital resources amid continuing deterioration in the national housing market. So much for improving investor confidence: Lehman's shares fell nearly 10 percent on the New York Stock Exchange in pre-market trading, and were off nearly 7 percent when this story was published. "I am very disappointed in this quarter's results," said CEO Richard Fuld. News of an effort to raise $6 billion in fresh capital comes on top of the $8 billion Fuld has already raised since February, and after Lehman posted better-than-expected results for the first quarter. Those results had many investors believing the worst of the mortgage mess may be behind Wall Street's largest investment banks, hopes that now were clearly premature. In a press statement, Lehman acknowledged that its hedging activity had failed it during the quarter, and said it incurred losses on hedges although it didn't disclose the degree to which ineffective hedges hit the bottom line. Many Wall Street firms are expected to report similar hedged losses this quarter, sources close to various investment banks told Housing Wire Monday morning. "Lehman isn't alone on this," said one source, an MBS trader who asked not to be identified by name. Lehman also confirmed that it had been delevering its balance sheet during the past month, and said it had sold $130 billion in assets -- including reducing its exposure to residential mortgages, commercial mortgages and real estate investments by 15 to 20 percent for each asset category. Gross leverage had been reduced from 31.7 of assets to under 25 times assets during the quarter, the company confirmed. Not surprisingly, driving much of the quarter's losses will be the company's fixed-income capital markets business, which Lehman said will contribute $3.0 billion in losses to the company's consolidated bottom line for the second quarter.
Moody's Investors Service wasted little time in lowering its rating outlook on the Wall Street firm, dropping the outlook to negative from stable and warning that it had concerns over "risk management decisions" at the company.
"Any additional net valuation marks that result in firm-wide losses in coming quarters would raise serious concerns about the effectiveness of Lehman's risk management and may create additional market unease about the firm, potentially weakening its franchise," Moody's analysts said in a press statement Monday morning.
Lehman has been the subject of fierce speculation over its future in recent weeks, with some market participants suggesting the embattled firm may be the next major investment bank to falter. Combating that perception will be critical to the firm's future, market participants told Housing Wire; similar perception of weakness brough Bear Stearns & Cos. to its knees in less than a week.
Lehman's formal results are set to be released on June 16; Monday's move to pre-announce results clearly suggests the firm is concerned that waiting until then may have put it at greater risk. The company stressed Monday that liquidity rose to $45 billion in the second quarter, up from $34 billion in the first quarter -- an attempt to quell investor concern.
"With our strengthened balance sheet and the improvement in the financial markets since March, we are well-positioned to serve our clients and execute our strategy," Fuld said.
Disclosure: The author was held no positions in LEH when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.