Lehman Brothers Holdings Inc. shares plunged to their lowest level in more than a decade Tuesday amid investor concerns that the battered investment bank is running out of options to raise capital.
The nation’s fourth-largest securities firm is scrambling to raise enough money to survive the global credit crisis. Lehman has been trying to find a major investor, and could possibly sell part of its investment management or real estate holdings for a quick infusion of cash.
However, word that high-level talks with state-owned Korea Development Bank broke down caused already anxious investors to dump shares of the embattled investment bank. Wall Street remains skittish about financial stocks since the near-collapse of Bear Stearns Cos. in March.
The stock plunged $6.36, or 45 percent, to $7.79 — the lowest level Lehman’s stock has hit since the financial meltdown of 1998 triggered by the collapse of hedge fund Long-Term Capital Management. It staged a slight recovery in after-hours trading after rivals’ Goldman Sachs Group Inc., Merrill Lynch & Co., Morgan Stanley and JPMorgan Chase & Co. confirmed they are still trading with Lehman.
Uncertainty about Lehman’s financial position has prompted speculation that the investment bank might announce quarterly results early, a move that could also stem the stock’s slide. Prashant Bhatia, an analyst with Citigroup, said Lehman could release details about the third quarter in the coming days.
Lehman needs to boost liquidity after suffering $8.2 billion in write-downs and credit losses since the financial crisis began last year, analysts said. Lehman had hoped to find a major investor before announcing third-quarter results Sept. 18, when it is widely expected to take another loss.
“At that point, we expect more clarity around where they are in terms of both earnings for the quarter and any strategic initiatives,” Bhatia said. “A pre-announcement will likely be a catalyst to stabilize the stock.”
Lehman could report a loss of between $2 billion and $4 billion, according to analysts. That would be on top of a $2.8 billion second-quarter loss, which was the first since Lehman spun off from American Express Co. in 1994.
In addition, Lehman Brothers is also working to quell criticism from major credit rating agencies. On Tuesday, Standard & Poor’s put Lehman’s debt on CreditWatch Negative because of the steep stock decline, which means the agency may lower the company’s ratings within months. Such a move would increase the amount of money Lehman pays to issue debt.
“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.
The steep decline in Lehman’s shares began shortly after Dow Jones Newswires reported that the head of South Korea’s financial regulator said talks about a possible investment had ended. Lehman Chief Executive Richard Fuld had been in negotiations with Korea Development Bank for several weeks about a capital infusion.
However, it appears that report itself is being disputed. Yoo Jae-hoon, a spokesman for South Korea’s Financial Services Commission, flatly denied any such statement was made. He said the regulator was “not in a position” to “broadcast how the deal is going.”
Mark Lane, a spokesman for Lehman Brothers, declined to comment. A spokesman for KDB could not immediately be reached for comment.
Like other investment banks, Lehman has been hit hard by deterioration in the credit and mortgage markets since the middle of 2007. Global banks during the past year have lost more than $300 billion from mortgage-backed securities and other risky investments.
In addition to securing an investment from KDB, speculation has also centered on Lehman selling its asset management division Neuberger Berman, and spinning off a portion of the company — such as its troubled mortgage-assets. Analysts have said Neuberger could fetch $7 billion to $8 billion in a sale.
Ladenburg Thalmann analyst Richard Bove wrote in a research note that the company might be asking too high a price for an investment or asset sales. The stock is down more than 80 percent so far this year, and traded at $67.72 one year ago.
“Buyers seem to believe that Lehman is overvaluing its assets and refuse to hit the bid,” Bove wrote in a research note. “The net result is no action.”
Fuld, whose own job is said to be on the line, is trying to avoid the same circumstances that caused the near collapse of Bear Stearns. Shares of Bear Stearns plunged in March amid rumors that it did not have enough liquidity to stay in business, and that led to its acquisition by JPMorgan.
However, in this case, Lehman Brothers is said to be having no credit or counterparty risks. Sanford C. Bernstein analyst Brad Hintz said in a note to clients that anxiety about Lehman might be driving the stock lower, but that the government would not let the company simply fail.
“Let’s recognize that the Federal Reserve is supporting the funding of four surviving large capitalization brokers, so the sharp decline in Lehman stock today is an equity issue, not a credit or counterparty issue,” said Hintz, a former chief financial officer for Lehman before becoming an analyst.
In Washington, Treasury officials refused to answer specific questions about Lehman Brothers but said Treasury Secretary Henry Paulson and other officers were closely following market developments. “We are monitoring markets and are in regular contact with market participants,” said Treasury spokeswoman Brookly McLaughlin.