Lehman Brothers, the beleaguered Wall Street investment bank, must raise capital, sell as much as $50 bn in distressed debt securities, and cut its dividend by 90%, among other moves, to calm deep concern over its liquidity problems, says Ladenburg Thalmann & Co. analyst Richard Bove in a research note.

Bove, a sharp-as-a-pencil numbers cruncher who is a top banking and brokerage analyst with a wide following on Wall Street, says Lehman (LEH) must take action because it may record a $3 bn to $5 bn loss in the next quarter. Bove also cut the price target on the stock to $23 from $27.   

An asset sale could also involve Lehman spinning off 20% of the asset management company Neuberger Berman. Bove assumes Neuberger earns $1 bn pretax and is worth 20 times post tax earnings. The firm by his calculations has a value of $13 bn.

After the asset sales, Bove is figuring Lehman may need to do a $2 bn capital raise in the form of a preferred offering and the issuance of more long-term debt, adding though that he thinks "Lehman will try hard to avoid the massive dilution that Merrill Lynch (MER) put in place," the analyst said. Merrill Lynch in recent months has raised billions of dollars via dilutive offerings.

Lehman has been dogged by persistent rumors that it could face a run on the bank similar to the one that caused Bear Stearns to crater earlier this year.

"My sense is that Lehman feels a need to take action now to stop, for once and, hopefully, for all, the constant stories and rumors swirling around the company," Bove, who rates Lehman shares neutral, wrote. "It is now possible that clients are thinking about their long term relationship with the company because the stories will not die. These clients are becoming increasingly unwilling to make commitments for more than short-term activities. Lehman must, therefore, act to solidify existing customer relationships."

Bove gave specifics on what he thinks Lehman will likely do: sell $30 bn to $50 bn in securities, mostly backed by commercial and residential mortgages at a discount, and absorb a loss of 10% on the sale; announce the spin-off of 20% of Neuberger Berman to the public; issue a $2 bn straight preferred; issue $1 bn in long-term debt; and cut the dividend, now costing the firm $400 mn annually, by 90%.

Bove predicted Lehman shares would rally if it moved to allay investor concerns.

The potential sale of Neuberger Berman was reported in the New York Post more than two weeks ago, citing a research note from UBS bank analyst Glen Schorr. The story also indicated that Lehman has been shopping the unit around for buyers.

The Post has also reported that Lehman is engaged in talks with prospective buyers about offloading some $30 bn in commercial mortgage assets and other hard-to-value securities, in a move similar to what Merrill Lynch has done.

The securities have clogged its balance sheet for months and resulted in the demotion of chief financial officer Erin Callan and president Joseph Gregory.

Bove said however that the quality of Lehman's "paper is believed to be significantly higher than the "sale" recently announced by Merrill Lynch (MER), adding that in turn "the discount may be as little as 10%."

"I do not know what the company is likely to sell; how much will actually be sold; and what the loss on the sale might be," Bove wrote. "My conviction is simply that the firm must cleanse its balance sheet of these securities to re-establish confidence and it will do so, no matter the cost."

Bove also increased his loss estimate for Lehman's fiscal 2008 year to $6.33 from $3.66 a share. The 2009 profit forecast was lowered to $1.93 a share from $2.51, and the 2010 estimate was cut to $2.60 from $3.22.

"However, be aware that the issue for buyers is what the longer term earnings prospects for the company are," he said. "These are not robust at the moment."