Lehman Bros. announces $2.8B loss

— -- LEHMAN/OUTLOOK (URGENT):Lehman sees $2.8 bln 2nd-qtr loss, to raise $6 bln

Determined to avoid the fate of Bear Stearns, which collapsed in March, Lehman Bros. pre-announced on Monday a second-quarter loss of $2.8 billion and said it raised $6 billion in new capital.

Shareholders reacted by selling off their shares, driving Lehman's leh price down almost 9% to $29.48.

But some analysts commended the firm for addressing the biggest questions hanging over it.

"This is the lesser of two evils for shareholders," said David Trone of Fox-Pitt Kelton.

Lehman's first quarterly decline since it was spun off from American Express in 1994 stemmed from trading losses, asset write-downs and hedges that didn't work out. The bank also aggressively sold troubled assets during the quarter, including $130 billion in real estate-related investments, junk-bond positions and other holdings.

"Asset sales are a good thing in the long term, but in the short term, they cause losses," Trone said.

Sandler O'Neill's Jeff Harte said in a research report that the asset sales provided a "modest silver lining" to the otherwise bleak news about earnings and a dilutive capital raise.

Most investment banks have seen the values of real estate-backed assets on their balance sheets decline since the subprime mortgage market imploded last summer. No firm was hit harder by the ensuing credit crunch than Bear Stearns, which had bet heavily on the subprime market.

Investors grew skittish about the firm after Bear Stearns announced billions of dollars in losses stemming from its mortgage-backed holdings. Competitors began to doubt that Bear Stearns had enough access to capital to keep its business flowing.

Bear's trading partners fled the firm in March, sucking capital out of the firm's coffers and bringing the bank to its knees. Within days Bear Stearns was sold to JPMorgan Chase jpm at $2 per share, a price which was eventually negotiated upward to $10 per share.

In a conference call with analysts, Lehman CFO Erin Callan said that the firm's recent asset sales had reduced the bank's leverage to 25 times its equity. Bear's leverage ratio had been higher than 30.

As for the disappearance of trading partners, Callan said Lehman had maintained its relationships with other banks, clients and trading partners throughout the quarter. Because it can borrow funds directly from the Federal Reserve, Lehman won't find itself in the same position as Bear Stearns this summer.

But Lehman's harshest critic remained unsatisfied.

"Lehman is raising $6 billion that they said they didn't need to replace losses that they said they didn't have," David Einhorn of Greenlight Capital, who has shorted Lehman's stock in the belief that it will sink, said in a statement.

Brad Hintz of Sanford Bernstein, who used to be Lehman's CFO, said the bank was getting its house in order so that its balance sheet would be "bulletproof" when the Fed closes its discount window to all investment banks in mid-September.