Is Market Rout Nearing End? Cheers!!!!

UBS, Lehman Capital Raisings May Signal Market Rout Nearing End

By Elena Logutenkova and Aaron Kirchfeld

April 2 (Bloomberg) -- Securities sales by UBS AG, the world's largest money manager, and Lehman Brothers Holdings Inc. underpinned a rally in financial stocks yesterday that may signal an end to eight months of market turmoil.

UBS, battered by the biggest writedowns from the collapse of the U.S. subprime mortgage market, announced plans to seek 15 billion Swiss francs ($14.8 billion) in a rights offer to replenish capital, while New York-based Lehman, the fourth- largest U.S. securities firm, raised $4 billion in a stock sale.

The fund-raising plans quelled speculation the companies might follow New York-based Bear Stearns Cos., which agreed to sell itself last month to JPMorgan Chase & Co. for a fraction of its market value after a run on the company. Investors looked past Zurich-based UBS's 12 billion-Swiss franc first-quarter loss disclosed yesterday after record writedowns on debt securities, as well as Deutsche Bank AG's $3.9 billion of markdowns.

``When UBS does a massively dilutive deal and the stock still goes up, that's helpful,'' said Henry Herrmann, chief executive officer of Overland Park, Kansas-based Waddell & Reed Financial Inc., which manages $65 billion. ``It's a rally associated with the presumed elimination of survival risk. The market's getting a little more comfortable that the crisis is over.''

UBS rose 12.3 percent in Swiss trading, the biggest gain in two weeks, leading a 5.1 percent rally in the 60-member Bloomberg Banks and Financial Services Index. The company has lost 55 percent of market value during the past 12 months.

`Enough Demand'

Chairman Marcel Ospel, 58, who helped form UBS through a merger a decade ago, will be replaced by general counsel Peter Kurer. UBS said it plans more job cuts at the investment bank and will set up a separate unit to segregate assets at risk from the credit-market meltdown.

Lehman advanced 17.8 percent in New York Stock Exchange composite trading, the most in two weeks, after increasing the size of its sale to 4 million convertible preferred shares from 3 million and saying demand ``significantly'' outpaced supply. Investors paid $1,000 for each Lehman preferred stock, which can convert to 20.0509 common shares once the stock reaches $49.87, or 32 percent higher than the closing price on March 31.

``Investors were worried that these big writedowns were going to impede their ability to raise capital,'' said William Fitzpatrick, an analyst at Optique Capital in Racine, Wisconsin, which owned 565,000 Citigroup Inc. shares as of Dec. 31. ``The way Lehman was able to bring in capital, that mitigates a lot of that risk. Clearly there's enough demand for these companies that raising capital is no longer the major overhang.''

Debt Writedowns

The debt market turmoil spurred by rising U.S. mortgage defaults hasn't abated, and presents the most severe crisis for banks in 30 years, Morgan Stanley and management-consulting firm Oliver Wyman said in a joint report yesterday.

The world's biggest financial companies reported about $232 billion in credit losses and writedowns since the start of 2007, data compiled by Bloomberg show. In all, investment banks may post $75 billion in markdowns in 2008, the report from analysts led by London-based Huw van Steenis said. Revenue from investment banking may drop 20 percent in 2008, with credit businesses declining 60 percent, the analysts said.

Deutsche Bank, which operates Europe's biggest investment bank by revenue, said yesterday that it expects to book first- quarter writedowns on leveraged loans, commercial real estate and residential mortgage-backed securities. The Frankfurt-based company said market conditions ``have become significantly more challenging.''

``I don't see how many banks are going to sustain revenue because parts of the business have disappeared due to the financial crisis,'' said Stefan Mueller, a managing partner at Proprietary Partners AG, a Frankfurt fund management company.

Federal Reserve

While investors agree that more writedowns and share-price swings are inevitable, Kevin Rendino, who runs the $6.5 billion BlackRock Basic Value Fund in Plainsboro, New Jersey, found cause for encouragement.

``You want to get all the bad assets off the balance sheets, and the banks are in the process of doing that,'' Rendino said in an interview. ``You're seeing the writeoffs, the charges and the replenishment of the balance sheets, so all that's good.''

The U.S. Federal Reserve cut its main lending rate on March 18 by three-quarters of a percentage point to 2.25 percent. The central bank also started a lending program for brokers, which is similar to the so-called discount window used by commercial banks, after the run on Bear Stearns.

``You can't ignore what the Fed has done,'' Rendino said. ``It's been a game-changing set of events over the last couple months. It doesn't make the bad assets worth more but it's going to be good for banks and it creates a better environment for financials going forward.''