Lehman Brothers Holdings Inc on Monday confirmed fears on Wall Street that the credit crisis is not quite over, and it left investors to wonder if other major investment banks face the same set of risks.
The US’ fourth-largest investment bank said wrong-way trading moves and risky mortgage-backed securities plunged it into a nearly US$3 billion second-quarter loss. It marks the first time Lehman was unable to post a profit since going public in 1994.
Its stock fell nearly 9 percent and helped drive a broad sell-off in bank and brokerage shares.
Lehman’s top executives, who have repeatedly assured investors that their books were safe, will fund the firm’s survival by raising US$6 billion of fresh capital. It is a move many of Lehman’s competitors have already been forced to make.
The announcements, made before the official release date of Lehman’s results next week, were an attempt to calm a market still badly shaken by the near collapse of Bear Stearns in March. Analysts were disappointed that Lehman’s loss was much deeper than they expected, and felt it could have an impact on rivals.
“There is a broader element to all this,” David Trone of Fox-Pitt Cochran said. “Management considered this to be an aberration, but I think you’ll see similar results in form and structure, just the magnitude will be smaller.”
Sanford C. Bernstein analyst Brad Hintz, a former chief financial officer of Lehman, said one concern is the US$130 billion of mostly residential and commercial real estate assets the firm sold during the quarter. Those sales triggered billions of dollars of gross mark-to-market adjustments — or accounting changes to the value of assets — since the beginning of last year.
He said that if those prices are deeply discounted, it would set a precedent that could hurt rivals like Merrill Lynch & Co, Morgan Stanley and Goldman Sachs Group Inc.
“There could be a modest domino effect,” Hintz said. Those companies have also had write-downs of mortgage-backed assets, with Merrill taking a heavy enough hit that it lost its CEO. Goldman is believed the be the strongest of the Wall Street companies.
Further, Lehman’s investments to hedge against troubled assets on its books backfired, and CFO Erin Callan said they “were significantly impacted” on during the past few months.
She said the highest point of the market’s disruption this year was in March, but conditions have eased since then.
Lehman said it expects to lose US$2.87 billion, or US$5.14 per share, for the period ended May 31, compared with the US$1.3 billion, or US$2.21 per share, it made in the year-ago period. Analysts had expected the company to report a loss of just US$0.22 per share for the period, according to Thomson Financial.
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