Struggling US investment bank, Lehman Brothers says its third quarter loss will be a much worse than expected $US3.9 billion ($A4.87 billion).
That’s 39%, or $US1.1 billion bigger than the $US2.8 billion second quarter loss. The bank revealed the preliminary figures overnight in an announcement brought forward by 10 days from late next week. The complete figures will be released then.
Lehman shares eased to $US7.25, down 6% from the weak Tuesday close of $7.79. The overall market in the US was up around 36 points as oil and commodity prices fell.
Investment analysts said the loss was disappointing, as was the lack of any new capital injection.
Driving the loss was $US7.8 billion in provisions and asset write-downs, After taking into account hedges, the losses were $US5.6 billion, plunging the firm into the red for the second consecutive quarter.
The loss compares poorly with the $US887 million earned in the third quarter of 2007 and represents a turnaround of more than $US4.7 billion. It was the biggest loss, and only the second, since it went public in its present form in 1994.
In addition it says it plans to spin off the majority of its real estate assets (which include billions of dollars of mortgages) into a separate company through an issue of shares in the new body to existing Lehman shareholders and it is selling a majority stake of around 55% in its funds management business.
But there was no sign of any big equity sale or capital injection after discussions with the Korean Development Bank for a stake of up to a reported 25%, failed.
Analysts said the nasty drop in the share price, and the fact that Lehman has just over 600 million shares on issue, meant that it could not raise fresh capital in sufficient quantities without badly diluting existing shareholders.
The announcement was rescheduled after the shares dropped 45% in trading Tuesday in New York as concerns grew about its financial state.
The approximate loss is also much worse than many market analysts were thinking: most had it losing around $US2 billion, or a bit more.
The investment bank has slashed its annual dividend to just 5 cents a share from 68 US cents, a move that will save it $US450 million a year.
The bank said in its statement that the loss "was driven primarily by gross mark-to-market adjustments stemming from write-downs on commercial and residential mortgage and real estate assets."
"Net revenues (total revenues less interest expense) for the third quarter of fiscal 2008 are expected to be negative ($2.9) billion, compared to negative ($0.7) billion for the second quarter of fiscal 2008 and $4.3 billion for the third quarter of fiscal 2007.
“Net revenues for the third quarter of fiscal 2008 reflect negative mark-to-market adjustments and principal trading losses, net of gains on certain risk mitigation strategies and certain debt liabilities.
"During the fiscal third quarter, the Firm is expected to incur negative gross mark-to-market adjustments on assets of ($7.8) billion, including gross negative mark-to-market adjustments of ($5.3) billion on residential mortgage-related positions, ($1.7) billion on commercial real estate positions, ($600) million on other asset-backed positions and ($200) million on acquisition finance positions.
"These mark-to-market adjustments were offset by $800 million of hedging gains during the quarter and $1.4 billion of debt valuation gains. The Firm is also expected to record losses on principal investments of approximately $760 million.
"In order to increase operating efficiency, the Firm has eliminated approximately 1,500 positions since the beginning of the third quarter in discretionary corporate areas and businesses that are in secular decline," Lehman said in the statement.
Lehman shares have lost 88% of its market value this year and fell 45% in New York on Tuesday after talks with Korea Development Bank about a strategic investment ended.
The Korean bank was one of several companies that Lehman has been in discussions with in recent weeks.
The New York-based bank was also continuing talks with private-equity firms including Kohlberg Kravis Roberts & Co. and Carlyle Group about selling its asset management business, which includes fund manager Neuberger Berman. Bids for that stake are believed to close this Friday night in New York.
Lehman plans to spin off commercial real estate assets worth $US25-$US 30 billion into a separate company early next year.
The vehicle, to be called Real Estate Investments Global, will be publicly listed and should cut Lehman’s remaining exposure to the troubled commercial real estate sector.
It is also in talks with Blackrock, the fund management group, to sell $US4 billion of the bank’s UK residential mortgage portfolio. That deal is expected to be completed within the next few weeks.
Nomura Holdings, Japan’s biggest investment bank, has been mentioned as a possible buyer of a stake in Lehman, but hasn’t confirmed that.
Lehman has been trying to raise capital and get rid of sick real-estate assets that contributed to the firm’s $US2.8 billion second quarter loss and saw the bank reveal $US8.2 billion in write-downs and credit losses in the past year.
Credit ratings agency Standard & Poor’s said it was placing Lehman on its CreditWatch list with negative implications, suggesting that S&P may cut its rating on Lehman’s debt.
