LONDON — U.S. investment bank Lehman Brothers is raising $6 billion to shore up capital after another big loss, rattling bank investors just as a UK rival completed a record fundraising.
Lehman said it expects a loss of $2.8 billion for its second quarter after losses on trading and hedging. It plans to rebuild capital by offering shares and convertible preferred stock through public offerings, diluting existing shareholders.
Shares in Wall Street's smallest major investment bank tumbled over 10 percent in premarket trading.
"The credit crunch is still with us and reverberating," said Chris Iggo, a strategist at AXA Investment Managers in London. "The fact that they're doing it and they still have problems on their balance sheet is no great surprise, but what it means is that the backdrop is still unfavourable."
Speculation about the health of Lehman had been widespread since the collapse of smaller rival Bear Stearns, which was rescued by JPMorgan Chase, but it is not alone in facing intense capital pressure during current market turmoil.
Shares in Swiss bank UBS fell sharply as it stuttered towards the finishing line of a $15.5 billion rights issue, with investors finding it hard to muster enthusiasm for extra stock in a bank that has burned its way through $37 billion in writedowns during the credit crisis.
That was despite more positive news from Royal Bank of Scotland on Monday, which said all but 5 percent of its shareholders had signed up for a $23.5 billion rights issue, the biggest ever.
The RBS take-up was higher than had been expected early in the process and provided some comfort that investors will back calls for funds even after steep falls across the battered sector.
But UBS shares fell 9 percent at one stage and were last down 4 percent at 23.6 francs. Its new shares will be issued at 21 francs and the period for trading the rights to buy them closes on Monday.
Both RBS and UBS shares have suffered rocky rides during their rights issue trading, and the turmoil in credit markets since last summer appears to have left the whole sector vulnerable to more speculative investors, analysts and investors said.
"The traditional shareholders for UBS would be growth funds investing in private banking but in the low-risk category. The new shareholders are recovery funds. And the recovery funds are driving a hard bargain," said Helvea analyst Peter Thorne.
UBS was also hurt by a report it could face a loss of almost $4 billion in the second quarter.
RBS shares rose in early trading but later reversed and accelerated lower and were last down 4 percent.
Underwriters for its rights issue were attempting to place more than $1.4 billion of stock with investors, and dealers had expected that to have been completed by mid-morning and may have been undermined by the Lehman news.
More Writedowns, More Capital
Banks and other financial firms have lost more than $330 billion from the U.S. subprime housing crisis and subsequent credit crunch, forcing them to raise over $200 billion from investors to patch up their balance sheets.
Citigroup has raised $42 billion from outside investors after also taking the biggest hit, totalling $46 billion. UBS ranks second in writedowns and capital raising.
U.S. and European regulators are keen for banks to hold a bigger cushion, which is used to protect depositors against losses, in the face of more writedowns and slowing revenue.
But analysts said there could be indigestion among investors, given how far shares have fallen and a full pipeline of banks still seeking funds.
France's Credit Agricole has kicked off a $9.3 billion rights issue and Britain's biggest home lender, HBOS, plans to launch a $8 billion rights issue at the end of this month.
Fund manager BlackRock said it expects the credit crunch to last another two to four years as a weakening U.S. economy triggers more writedowns.
"We've seen the worst of it in terms of crisis, writeoffs, but there is still more to come," Bob Doll, BlackRock's chief investment officer for equities said. "A slowing below-trend growth in the economy will expose more of them. Whether it is in the mortgage area ... or in other consumer loans, auto loans, credit card loans -- there are more writeoffs to come," he told reporters in Singapore.
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