June 9 (Bloomberg) -- It's been at least 10 years since Lehman Brothers Holdings Inc. Chief Executive Officer Richard Fuld watched his company's share price drop 50 percent from the peak, assets on the books shrink 15 percent from their highs, and his bankers rush to raise enough capital to withstand any run on his firm.

Now, as Lehman reports a $2.8 billion loss -- its first since the company's spinoff from American Express Co. in 1994 -- Fuld is doing everything he can to ensure that the fourth- largest securities firm survives another year if not the next 10. Trouble is he's discarding some of the elements that enabled New York-based Lehman to report faster earnings growth from 2002 to 2007 than any of his competitors except Goldman Sachs Group Inc.

Lehman disclosed the second-quarter loss today and simultaneously raised $6 billion by selling shares to the public. To reduce market risks, the company said it unloaded about $130 billion of holdings during the quarter, whittling down assets tied to mortgages and leveraged-buyout loans by as much as 35 percent.

``They're doing all the right things, such as de-leveraging aggressively, but these are stressful times, and they don't always get the credit they deserve,'' said UBS AG analyst Glenn Schorr, who has a ``neutral'' rating on Lehman. ``Although Lehman is very different than Bear, there's one similarity, and that's what could undo all the other positives: perceptions can become reality.''

Lehman fell 8.7 percent to $29.48 at 4:15 p.m. in New York Stock Exchange composite trading, after the firm said it sold $2 billion of convertible preferred stock and $4 billion of common shares for $28 apiece, 13 percent below the June 6 close. The sale was oversubscribed, a person close to the bank said.

Bear Stearns

Fuld, whose career at Lehman spans four decades, slashed assets by 20 percent in 1998 when slumping debt markets in Russia and Asia prompted speculation his company might founder. Fuld, 62, may need all the ammunition he can get this year as some investors bet Lehman will be next to stumble after Bear Stearns Cos. ran out of cash in March and was forced to sell itself.

Lehman said last week it trimmed its so-called matched book, made up of short-term lending backed by short-term borrowing, during the second quarter, helping increase the firm's cash position by about one third to $45 billion.

Capital

Lehman has more than twice as much cash as Bear Stearns before its sale to JPMorgan Chase & Co. It will have almost three times as much capital -- $35 billion after today's planned capital raising -- as Bear Stearns had.

After the asset sales and $4 billion of Tier 1 capital raising during the quarter, Lehman's leverage ratio -- total assets compared with equity -- fell to 25 from 32 at the end of the first quarter, compared with 34 at Bear Stearns, 33 at Morgan Stanley and 24 at Goldman Sachs, the biggest U.S. securities firm by market value, data compiled by Bloomberg show.

Lehman may sell about $120 billion more of assets this year, Ladenburg Thalmann & Co. analyst Dick Bove estimates. With the planned capital boost, Lehman's leverage ratio would drop to about 15, based on Bove's forecast.

By de-leveraging, Lehman is reducing its chances of ever being as profitable as it was in 2006, said Michael Hecht, a New York-based analyst at Bank of America Corp. The firm's return- on-equity will be half its average of the past 10 years, according to Hecht. The decrease in risk taking by Lehman will inevitably mean lower profitability, according to Sanford C. Bernstein & Co. analyst Brad Hintz in New York.

Risk Profile

``For the next couple of years, Lehman limps along with earnings that will be significantly below what they were earning in previous years,'' Bove said. Lehman has shed 6,400 jobs since last July, or 25 percent of the workforce, the highest percentage of cuts among banks and brokers, according to Bloomberg data.

Chief Financial Officer Erin Callan said in April that the decline in risk profile would be somewhat offset by the higher premium Lehman and other Wall Street firms can charge clients in a market where credit is scarce. Citigroup Inc. analyst Prashant Bhatia expects return on assets to climb because of ``a premium being put on capital going forward.''

``We are buyers of the stock on the assumption that Fuld will steady the Lehman ship and, with greater stability, the stock will appreciate,'' Deutsche Bank AG analyst Mike Mayo wrote in a report to clients last week.

Loss Compounded

Lehman's second-quarter loss was compounded by market bets against mortgage indexes that were made in preparation for the company's de-leveraging effort, according to people familiar with the investment bank's finances. Lehman lost $500 million to $700 million from the trades when the indexes rose, the Financial Times reported last week, citing people close to the matter.

``Fuld should have known better than piling on assets as the mortgage market was peaking,'' Bove said. ``But Fuld is a hands-on manager, so he's biting the bullet and bearing losses as he sells assets. Lehman will come through with this.''

Hedge fund manager David Einhorn, who has bet Lehman's shares will fall, has criticized the firm's accounting techniques, saying it hasn't taken realistic markdowns on its mortgage portfolio. Although an index of commercial mortgage- backed bonds fell 10 percent in the first quarter, Lehman's writedowns on its $39 billion portfolio was 3 percent, Einhorn said in a speech last month. While Einhorn expects Lehman's losses to increase as it takes further asset writedowns, he said last week that he doesn't expect the company to collapse.

Market Sentiment

At the end of the first quarter, the company had the largest ratio of mortgage-related assets to equity among its Wall Street competitors, according to Hintz of Sanford Bernstein. The reduction in the second quarter still leaves about $100 billion of hard-to-sell assets, including leveraged loans, on the balance sheet, and there may be further losses as Lehman unloads them, said David Trone, a New York-based analyst at Fox-Pitt Kelton Cochran Caronia Waller.

Lehman has lost more than half its market value this year, making it the worst performer in the 11-company Amex Securities Broker/Dealer Index. After Standard & Poor's downgraded Lehman, Morgan Stanley and Merrill Lynch & Co. last week, Lehman fell twice as much as its New York-based rivals.

``Every time something bad happens in the markets, Lehman shares go down the most because they're seen as more vulnerable,'' said Corne Biemans, a Boston-based senior portfolio manager at Fortis Investments, which oversees about $200 billion. The global financials fund Biemans manages doesn't own Lehman shares, though other Fortis funds do.

Credit Downgrade

Lehman survived its first bout of panic sales on March 17, the day after Bear Stearns agreed to be sold to New York-based JPMorgan for a price equal to about 7 percent of its market value. Lehman shares dropped by as much as 48 percent on concern it was the next to go. The stock recovered all its losses and gained some the next day when Lehman reported first-quarter profit that beat analysts' estimates.

Last week's decline was triggered by S&P's downgrade to A from A+ and worsened with speculation that Lehman was borrowing from the Federal Reserve because it faced a cash shortage. Officials at the firm denied the Fed facility gossip on June 3 and three analysts published reports in the next two days urging investors to buy the stock. Lehman still fell 12 percent last week in New York Stock Exchange composite trading to close at $32.29 on June 6, bringing this year's decline to 51 percent and to 62 percent since February 2007, when the subprime crisis began.

Hedge-Fund Clients

As the company hunkered down with asset sales and capital raisings, it gained a powerful weapon that Bear Stearns didn't have: access to federal funds. The day it brokered the sale of Bear Stearns to JPMorgan, the third-biggest U.S. bank by assets, the Fed made a new facility available to all broker-dealers, allowing them to borrow cash directly just like commercial banks.

``The Fed has telegraphed that nobody is going down this time, but that doesn't seem to be enough to erase the concerns,'' said Peter Goldman, a managing director at Chicago Asset Management, which oversees about $500 million.

Bear Stearns failed to raise any capital, even as concerns about its future increased. Lehman sold $1.9 billion of perpetual preferred shares in February and followed that up with a $4 billion capital infusion on April 1 from the sale of preferred stock.

Pension Fund Talks

Executives at Lehman were in talks with at least one U.S. pension fund and an overseas investor to raise capital before today's announcement, according to a person with knowledge of matter who asked not to be identified because the negotiations were confidential.

Unlike Bear Stearns, Lehman has ``better friends around the Street'' to turn to for money in times of need, UBS's Schorr said. Among those are clients of Lehman's asset-management business, which accounted for about 25 percent of first-quarter revenue, said Ladenburg Thalmann's Bove.

Fuld spent the past five years diversifying the firm's business. He has made Lehman the largest trader of stocks on the London Stock Exchange and Euronext, and the fifth-biggest adviser of U.S. mergers. Today, half of Lehman's revenue comes from outside the U.S.

Even though Lehman is not Bear Stearns, that doesn't mean it's certain to escape its former rival's fate, said Tom Jalics, a Cleveland-based analyst at National City Bank, which manages $34 billion, including Lehman shares.

`Rational Analysis'

``Market reactions these days aren't based on rational analysis; it's all about sentiment,'' Jalics said. ``With the turmoil in the market and the uncertainty about funding and liquidity issues, nobody knows for certain what might happen.''

Bond investors aren't as worried about a possible collapse as equity investors. The cost of insuring Lehman against a default on its debt rose to 250 basis points last week when the stock hit bottom. It was at 450 basis points in March before the Bear Stearns collapse.

``The U.S. financial sector cannot see another bank go sour,'' said Marino Marin, a former Lehman banker now a New York-based managing director at investment bank Gruppo, Levey & Co. ``It would be devastating for the global financial system and hurt confidence.''

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: June 9, 2008 16:28 EDT