Week in review: Lehman on the brink; rights issues go awry

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Lehman Brothers lost again. On Monday, the bank raised $6bn through a rights issue and announced its second quarter results early, revealing a larger than expected loss of $2.8bn.

By Wednesday, the bank's stock was down 25%.

Lehman's attempts to raise $6bn from Korea came to nothing. Reuters said some counterparties were becoming wary of doing business with the bank, and questions were raised over Lehman's long-term business model.

CFO Erin Callan said the results were an aberration, but together with COO Joseph Gregory she was consigned to oblivion on Thursday. The Wall Street Journal said both Callan and Gregory went voluntarily.

Questions remain over Lehman's future. The bank reduced its leverage ratio from 31.7 at the end of Q1, to 25 at the end of Q2 (vs. 27.9 for Goldman and 23.8 for Merrill), but still has an estimated $65.bn of troublesome assets on its books.

Critics say Lehman failed to build up a sufficient capital cushion during the good times and that it's only a matter of time before the bank loses its independence.

Creditsights analyst David Hender spoke to Lehman's treasurer who said Lehman is not in danger of going the way of Bear Stearns because it uses longer-term and tri-party repo agreements rather than short-term bilateral ones.

Rights issues caused ripples, with Morgan Stanley and Dresdner said to be left with a 4bn underwriting bill after the HBOS share price collapsed.

More promisingly, UBS said its rights issue was 99.4% successful and RBS said its right issue has had a 95% take-up rate.

Britain's five leading banks stepped in to underwrite the Bradford & Bingley rights issue, leading to speculation that the FSA may have intervened.

Barclays Capital is expected to be the next to raise capital.

Funding concerns remained, particularly over the expected closure of the Fed's discount window for investment banks in September.

Merrill's Thain called for the temporary window to stay open, possibly because Merrill has lower leverage than rival banks, and therefore less to lose from any Fed-imposed leverage clampdown in payback for its generosity. Robert Steel, US Treasury undersecretary, stressed that the window is temporary.

Vikram Pandit ended up costing Citigroup $800m after his hedge fund, Old Lane, was put out of its misery, obliging Citigroup to take $9bn of its assets onto its balance sheet.

Bank of America's investment bankers looked a little more secure: Ken Lewis said he liked them after all. But B of A was said to be laying off investment bankers in the US all the same.

B of A sold its prime brokerage business to BNP Paribas.

Hiring still happened: Barclays Capital poached a team of healthcare bankers from Bear Stearns/JPMorgan. But BarCap was also said to have cut 100 people, including 20 leveraged financiers.

Standard Chartered said it plans to add 25-50 M&A bankers this year.

Jobless bankers can always write a book. Bloomberg says a Citigroup branch manager has found success with a novel about a cross-dressing Turkish sleuth.

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