June 14 (Bloomberg) -- Lehman Brothers Holdings Inc. shareholders rallied behind Chief Executive Officer Richard Fuld after a week-long decline in the stock, a management shake-up and the first quarterly loss since the investment bank went public.

BlackRock Inc., the largest publicly traded fund manager in the U.S., and Maurice ``Hank'' Greenberg, the former CEO of American International Group Inc., the world's biggest insurer, bought stakes in Lehman this week and said they remain optimistic about the company's prospects. Putnam Investments LLC, the mutual fund firm that oversees about $173 billion, invoked the ``strong franchise'' Fuld has built in his four-decade career.

Fuld, 62, stunned Wall Street on June 12 by replacing Chief Financial Officer Erin Callan and President Joseph Gregory in an effort to reassure investors amid speculation that mortgage-market losses will continue to drag down earnings. The demotions capped a 42 percent drop in Lehman's shares on the heels of a $6 billion cash infusion. The longest-serving CEO on Wall Street snapped the losing streak yesterday, when the stock gained 14 percent in New York trading, the biggest rise since April 1.

``We have confidence in the firm, in the leadership,'' BlackRock President Robert Kapito, 50, said yesterday in an interview. ``They have a history of being a team, a place of focus, of working out their situations, of having confidence in the marketplace.''

The mortgage-bond crisis that eventually spread to Lehman ignited a year ago on June 14, when Bear Stearns Cos. began liquidating holdings from one of its hedge funds after making money-losing bets on securities tied to subprime home loans. Less than a week later, Merrill Lynch & Co. seized and sold $800 million of the fund's bonds held as collateral.

Shedding Assets

Merrill's action helped provoke a global credit contraction that has cost the world's largest banks and brokerages more than $390 billion. It ultimately led to Bear Stearns's demise in March, when the fifth-largest U.S. securities firm was sold to JPMorgan Chase & Co. for $10 a share.

Bear Stearns and its former chairman and CEO James ``Jimmy'' Cayne, like Fuld now, won support from prominent shareholders as the firm's market value sank. Billionaire Joseph Lewis, the British-born, Bahamas-based currency trader, paid $860 million for a 7 percent stake in September.

Lehman on June 9 tried to boost Wall Street's confidence by raising $6 billion from outside investors and announcing it had shed $130 billion of unwanted assets. At the same time, the 158- year-old company reported a $2.8 billion loss in the three months ended May 31, marking the first quarter since the firm was spun off from American Express Co. in 1994 that Fuld failed to deliver a profit.

Fuld's Office

The capital infusion failed to halt the decline in Lehman's shares, which fell 8.7 percent that day. On June 10, as the stock slid almost 7 percent, finance chief Callan told Fuld that investors had lost confidence in her, according to a person close to the firm.

Gregory, the president, went into Fuld's office in the early evening, the person said. The 56-year-old had been one of Fuld's closest associates for almost 30 years. When they emerged from Fuld's office, the two men announced that Gregory was stepping down, the person said.

The next day, after Lehman announced Herbert ``Bart'' McDade's appointment as president, Fuld told employees on the firm's trading floor that Gregory had asked to be relieved of his duties. McDade, 48, was head of equities worldwide.

Gregory and Callan remain at Lehman. Callan, 42, is returning to the investment-banking unit in a ``senior capacity,'' the company said last week. Gregory's position wasn't specified.

Increased Stake

``Based on our research and first-hand experiences with the company in a variety of areas, we have a high regard for Lehman's business lines and management team,'' the New Jersey Division of Investment said in an e-mailed statement. ``We are pleased to have the opportunity to increase our investment.''

The New Jersey pension fund bought $120 million of Lehman common stock at $28 a share, and $60 million of preferred shares with an 8.75 percent dividend.

``Lehman is a very good franchise,'' Greenberg, the 83-year- old former AIG chief, told CNBC, without specifying the size if his stake. ``They've done a great deal to reduce their leverage. I think they'll do fine. They've done a good job marking down the things that should be marked down.''

The larger-than-predicted second-quarter loss prompted analysts at Merrill, Wachovia Corp. and Oppenheimer & Co. to lower their ratings and estimates for the stock. Merrill analyst Guy Moszkowski cut his rating to ``neutral' a week after telling clients to buy, helping send the shares down 14 percent on June 11. Fuld said he was ``very disappointed'' with the quarter's results.

`The Long Run'

Lehman rose yesterday in New York trading, posting the biggest increase since April, following the votes of confidence from BlackRock and Putnam Investments. The stock is still the worst performer in the 11-company Amex Securities Broker/Dealer Index this year, down more than 60 percent.

Kevin Cronin, Putnam's head of investments, predicted Lehman would rebound. Putnam is Lehman's 16th-largest shareholder, according to Bloomberg data. The Boston-based mutual fund firm has bought Lehman bonds, stock and convertible shares in previous offerings this year.

``We're holders of all levels of their capital structure,'' Cronin, 47, said in an interview. ``The market has unfairly punished the price of their stock and bonds. We know they're going to be winners in the long run.''

To contact the reporters on this story: Josh Fineman in New York at jfineman@bloomberg.net; Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: June 14, 2008 18:27 EDT