The downgrade will spell higher financing costs for Lehman when it comes to borrowing money. And that obviously won't be good news for the New York-based investment bank where every penny is being scrutinized.
Fitch blamed the downgrade on "increased earnings volatility, changes in its business mix due to
contraction in the securitization and structured credit markets and the
level of risky assets exposing earnings to challenges in hedge
effectiveness."
Lehman is in the eye of the storm of this seemingly never-ending credit crunch. Although it wasn't as heavily invested as its former peer Bear Stearns Cos. in the subprime debacle, Lehman still saw its share of pain, reporting a preliminary second-quarter earnings loss of $2.8 billion on Monday. Final results will be released June 16.
Fitch will be eying how Lehman executes its divestiture strategy. The agency "believes Lehman will continue to sell riskier assets and reduce its overall risk in specific asset classes, particularly residential and commercial mortgages." But at what price? Those assets have too much risk and will likely garner only a fraction of what Lehman paid for them. Of course, with its back against the wall, maybe Lehman doesn't have much of a choice. - Gerald Magpily
See Fitch press release
See Dealscape: Losses up at Lehman
See Bloomberg article
Lehman Brothers Inc. is doing everything it can to bolster its bottom line by aiming to keep costs down with layoffs and divestitures as well as increasing its reserves with a $6 billion public offering. But Fitch Ratings isn't convinced. The debt rating agency downgraded its long-term ratings on Lehman to A+ from AA- and short-term ratings to F-1 from F-1+. 
