Lehman shares plunge on capital raising fears

By Dan Wilchins

NEW YORK (Reuters) - Lehman Brothers Holdings Inc LEH.N shares tumbled to close at nearly a 5-year low on Tuesday on concern that Wall Street's smallest surviving major brokerage may need to raise more capital.

The upheaval at Lehman -- which has already cut thousands of jobs and raised $4 billion to cushion the impact of previous write-downs -- was the latest reminder that it and larger rivals may be struggling to put the credit crunch behind them.

Lehman shares temporarily cut their losses after the company denied market rumors that it had borrowed directly from the Federal Reserve in recent days, but still fell 9.5 percent, their steepest drop since the Bear Stearns meltdown in March.

"I think there's still a confidence issue there," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. "The market may be saying: 'Well, we've heard this before.' Bear Stearns is still fresh in people's minds."

Lehman said it last used the Fed credit line on April 16 "for testing purposes." It also said in an e-mailed statement that the company "finished the second quarter well above $40 billion" in terms of liquidity.

Lehman spokeswoman Kerrie Cohen declined to comment on a report in The Wall Street Journal that Lehman was considering raising billions of dollars in fresh capital.

A source familiar with the situation earlier said Lehman had no need to raise capital and would do so only if the right market opportunity presented itself, or if the firm thought it would help investors' perceptions.

The source said a move to raise capital was only one of "dozens" of options for the investment bank.