Lehman Brothers poised for $5bn cash call as credit woes mount

Investors in Lehman Brothers, one of the top five Wall Street investment banks, are bracing themselves for more pain as the company considers issuing between $3bn and $4bn (£1.5bn-£2bn) in new shares to shore up its balance sheet.

The share issue would dilute existing shareholders' stake in the group, which is set to post its first quarterly loss since going public, because of continuing problems related to the credit crisis. Lehman sources say a new fund raising is one of dozens of options under consideration, but a growing number of analysts believe it will be necessary to seek new capital to weather the credit crisis and a sharp downturn in the bank's credit derivatives business.

And yesterday, Lehman shares plunged amid rum-ours of a liquidity crisis at the company that had forced it to tap the US Federal Reserve for emergency funding. Only a robust denial by the company helped its shares recover, but they still ended 9.5 per cent lower, after an 8 per cent decline on Monday. They have halved since the start of the year and now sit at levels not seen since 2003.

The bank was tagged by speculators as "the next Bear Stearns" since the collapse of its rival in March. But Lehman says it is well capitalised and its executives have plenty of experience in dealing with the sort of crises of confidence which undid Bear Stearns.

Also since March, the US Federal Reserve has promised to act as a lender of last resort to investment banks, to shore up confidence and prevent the collapse of any company integral to America's financial system. Lehman has already raised $6bn in capital since the start of the crisis, to make up for losses on sub-prime mortgages and other credit derivatives.

The credit rating agency Standard & Poor's, which downgraded its rating on Lehman Brothers corporate debt on Monday, said yesterday that there might be more writedowns to come on its portfolio of credit instruments, and the outlook for its business was particularly sour. Tanya Azarchs at S&P said earnings growth "could be considerably more muted" because Wall Street was working on fewer mergers and acquisitions, underwriting fewer debt issues for corporate clients and finding no buyers for the sorts of esoteric credit instruments that fuelled the credit bubble of recent years.

Bear Stearns collapsed in March when concerns grew that it did not have access to enough funds to meet day-to-day trading obligations, prompting trading partners to stop doing business with the firm. Lehman Brothers responded by setting out much more detail about its position, helping to reassure trading partners. As well as improving the confidence of its trading partners, a new $3bn-$4bn fund raising would help to fund future business.