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Lehman to Raise $6 Billion, Shares Plummet

The battered firm will issue common and preferred stock.
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Updated from 12:53 p.m. EDT

Lehman Brothers

(LEH)

on Monday warned it would post a $2.8 billion second-quarter loss and said it would raise $6 billion through common and preferred stock offerings.

The loss comes to $5.14 per diluted common share, vs. a profit of $1.3 billion, or $2.21 per diluted common share, in the second quarter of last year. Analysts polled by Thomson Reuters had expected a loss of 22 cents a share in the second quarter.

"

Monday's results were far worse than anyone had anticipated," wrote Goldman Sachs analyst Bill Tanona in a research report following the announcement.

Lehman Brothers expects negative revenue of $700 million, compared to positive revenue of $5.5 billion in the year-ago period. Analysts had expected revenue of $2.62 billion. The second-quarter results reflect negative mark-to-market adjustments and principal trading losses, as well as rising debt liabilities. The firm also said it incurred losses on hedges this quarter "more than offset" gains from some hedging activity.

"I am very disappointed in this quarter's results," Chairman and CEO Richard Fuld said in company statement. "Notwithstanding the solid underlying performance of our client franchise, we had our first-ever quarterly loss as a public company. However, with our strengthened balance sheet and the improvement in the financial markets since March, we are well-positioned to serve our clients and execute our strategy."

Lehman Taps More Liquidity

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Lehman plans to issue 143 million shares of common stock for $28 apiece. The firm is selling $2 billion worth of preferred shares that will carry an 8.75% yield and be convertible into common stock in a price range between $28 and $33 each, according to a Securities and Exchange Commission filing. The preferred shares will be converted to common stock after three years, with cash provided in lieu of fractional shares, the company said.

Moody's Investors Service responded by lowering Lehman's outlook to negative from stable and Fitch Ratings lowered its long- and short-term issuer default ratings to A-plus from double-A negative. Fitch maintained a negative outlook.

Lehman shares had dipped nearly 12% before a 10 a.m. conference call with Lehman CFO Erin Callan, but rose slightly as Callan said that Lehman's liquidity remains strong and provided details on asset sales, which total $130 billion. Liquidity is now $45 billion, compared to $34 billion at the end of the first quarter.

Despite these assurances, Lehman's share price dropped briefly during the question and answer session, as analysts began picking apart some of the data she provided. Shares closed down 8.7% lower at $29.48.

Lehman will formally announce results June 16. The firm has increasingly been viewed on the Street as the logical next shoe to drop, in the wake of Bear Stearns' demise. Bear had to be rescued by the

Federal Reserve

and sold at a cut-rate price to

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JPMorgan Chase

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in a deal that Bear shareholders approved last month.

When Life Hands You Lehman, Use Options

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Though Lehman looked around the world for investors, most were U.S. institutions in the end,

The Wall Street Journal

reported. These included C.V. Starr and the New Jersey Division of Investment, the paper reported.

Lehman's shares have plummeted more than 50% in 2008 as investors have grown concerned about its financial health and the extent of its exposure to toxic subprime mortgages.

Other financials, including

Merrill Lynch

(MER)

,

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

and

Morgan Stanley

(MS) - Get Morgan Stanley (MS) Report

, also were down fractionally in recent trading.