NEW YORK (Reuters) - Lehman Brothers Holdings Inc (NYSE:LEH - News) shares sank more than 40 percent on Tuesday on concern that talks on a possible investment from Korea Development Bank had broken down and that the fourth-largest Wall Street investment bank would be unable to raise needed capital.
Shares began falling after a Dow Jones Newswires report that the chairman of South Korea's top securities regulator, Jun Kwang-woo, had said talks between Lehman and KDB had ended. A spokesman for the regulator denied the report, telling Reuters that Jun never made any such declaration.
The Dow article also quoted an unnamed government official as saying KDB had decided not to invest in Lehman.
"The market fears that no one will inject capital in the company," said Nick Kalivas, equity market analyst at MF Global Research in Chicago.
In afternoon trading, Lehman shares were down $5.95, or 42 percent, at $8.20 on the New York Stock Exchange.
The slide wiped out more than $4 billion of market value, based on reported shares outstanding, and was a factor in broad declines in major U.S. stock indexes. Prices of safe-haven U.S. Treasuries rose. Lehman shares touched their lowest level since October 1998, Reuters data show.
A Lehman spokeswoman and representatives for the U.S. Federal Reserve and Securities and Exchange Commission declined to comment. A U.S. Treasury Department spokeswoman said the department stays in touch with Wall Street on a regular basis.
Standard & Poor's said it may cut Lehman's "single-A" long-term credit rating, its fifth-lowest investment grade, citing "heightened uncertainty" about the bank's ability to raise capital as its shares fall. It said a downgrade could be more than one notch.
Lehman shares were down 87 percent from a 52-week high of $67.73, set last Nov 14.
"This has been going on for a while now and people are worried about liquidity, survival," said Rose Grant, a portfolio manager at Eastern Investment Advisors in Boston. She said the firm invests $1.8 billion and has never owned Lehman shares.
OPTIONS NARROW
Lehman Chief Executive Richard Fuld has been scrambling to raise capital as losses mount from its mortgage holdings.
The bank has been reviewing options for its Neuberger & Berman asset management unit, one of its healthier businesses, and some analysts expect it to spin off or dispose of much of its commercial real estate portfolio. Analysts have said Neuberger could fetch $7 billion to $8 billion in a sale.
Lehman had a second-quarter loss of $2.8 billion, or $5.14 per share. Analysts on average expect a third-quarter loss of $3.04 per share, according to Reuters Estimates.
Sean Egan, managing director at Egan-Jones Ratings Co in Haverford, Pennsylvania, said Lehman may have limited options to raise capital.
"There are relatively few parties who have the ability to move quickly to help shore up Lehman Brothers' credit quality," he said. "Unfortunately, Lehman has to move rapidly to calm counterparty concerns."
Smaller rival Bear Stearns Cos collapsed in March after its trading partners stopped doing business with it, triggering the equivalent of a bank run. Bear was subsequently acquired by JPMorgan Chase & Co (NYSE:JPM - News).
DEBT PROTECTION COSTS RISE
On Monday, Lehman said it expected to report third-results and discuss "key strategic initiatives" on September 18.
But Citigroup analyst Prashant Bhatia on Tuesday wrote that Lehman might announce the quarterly results as soon as today because of downward pressure on its shares.
The cost of protecting Lehman debt with credit default swaps rose to 450 basis points, or $450,000 annually for five years to protect $10 million of debt, from 325 basis points on Monday, according to Phoenix Partners Group.
"Lehman's been rumored to be in trouble for a while, and people were hoping the Koreans might bail them out, but now they're not sure that's going to happen," said Todd Leone, head of listed trading at Cowen & Co in New York.
Richard Bove, an analyst at Ladenburg Thalmann & Co, said a weekend management overhaul at Lehman, including the departures of its fixed-income chief and a top international executive, signaled that talks on raising capital weren't going well.
"People simply made the decision that they didn't want to be anywhere near this company because management was no longer in control of what was in the best interest of shareholders," he said.
(Additional reporting by Dena Aubin, Paritosh Bansal, Elinor Comlay, Joseph A. Giannone, Steven C. Johnson, Juan Lagorio and Richard Leong in New York; David Lawder and Rachelle Younglai in Washington, and Kim Yeon-hee in Seoul; Editing by John Wallace)
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