Lehman Brothers Struggles To Survive

17 July 2008 - New York , NY - Lehman Brothers Building. Photo Credit: Brian Zak/Sipa Press (Sipa via AP Images)
Sipa via AP Images
Struggling to survive the credit crisis, Lehman Brothers Holdings Inc. plans to sell a majority stake in its prized investment management division, slashed its dividend and may even consider selling the entire company.

Lehman, whose shares have plunged more than 80 percent this year as investors lost confidence in the financial services firm, also said Wednesday it lost $3.9 billion during the third quarter. The company, like others on Wall Street, suffered from wrong-way bets on mortgage securities and other risky assets.

The company did not name a buyer for a 55 percent stake in its prized investment management business, which includes Neuberger Berman. And it plans to spin off to shareholders $25 billion to $30 billion of its commercial real estate portfolio into a publicly-traded company called Real Estate Investments Global early next year.

The company also plans to slash its annual dividend to 5 cents from 68 cents weighed on stock futures.

It said it would consider all alternatives to boost shareholder value, often a reference on Wall Street to a company's willingness to consider a sale.

"This is an extraordinary time for our industry, and one of the toughest periods in the firm's history," Chief Executive Richard Fuld said in a statement.

The unusual steps come as Korea Development Bank confirmed Wednesday it has ended investment negotiations with Lehman Brothers "due to differences in transaction terms with Lehman and in consideration of the domestic and international financial market situation."

Speculation that talks with KDB were failing caused shares of Lehman Brothers to plunge 45 percent to $7.79 on Tuesday. The drop puts Lehman's market value at just $5.4 billion, down from $36 billion one year ago and well below that of smaller rivals like discount brokers Charles Schwab Corp. and TD Ameritrade Holding Corp.

The sell-off stoked a sense of urgency that Lehman must demonstrate to Wall Street that it has enough liquidity to survive a year-old credit crisis that has cost it $8.2 billion in write-downs and credit losses. Analysts believe Lehman will lose between $2 billion and $4 billion during the third quarter as it contends with $70 billion of troubled real estate assets.

Wall Street remains skittish about financial stocks since the near-collapse of Bear Stearns Cos. in March. Like other investment banks, Lehman has been hit hard by deterioration in the credit and mortgage markets since the middle of 2007. Global banks have so far lost more than $300 billion from mortgage-backed securities and other risky investments.

Lehman has approached a broad range of possible investors, including banks in Korea and Japan. Private-equity firms in the U.S. have also been contacted about investing in a spin-off of the firm's investment-management business, which includes Neuberger Berman.

Besides Neuberger Berman, the unit also includes everything from private client services to private equity components. Analysts believe it could fetch up to $10 billion, or that Lehman might spin-off half of the business to an outside investor much like how Merrill Lynch & Co. owns a 49 percent stake in asset manager BlackRock Inc.

There is also talk that Neuberger's management might get an opportunity to buy back all or part of the company. Lehman bought the firm in 2003, and Neuberger executives have expressed interest in completing such a deal, according to several media reports.
Fuld, whose own job is said to be on the line, is trying to avoid the same circumstances that caused the near collapse of Bear Stearns. In March, Bear Stearns' share price plunged amid rumors that it did not have enough liquidity to stay in business, leading to its acquisition by JPMorgan Chase & Co.

However, in this case, Lehman Brothers is said to be having no credit or counterparty risks. Spokesmen for Merrill Lynch, Goldman Sachs Group Inc., JPMorgan Chase & Co., and Morgan Stanley all said late Tuesday that they are still conducting business with Lehman.

In addition, analysts believe that the government is closely monitoring Lehman's position and would act if necessary to not let the company simply fail.

"Let's recognize that the Federal Reserve is supporting the funding of four surviving large capitalization brokers, so the sharp decline in Lehman stock (Tuesday) is an equity issue, not a credit or counterparty issue," said Sanford C. Bernstein analyst Brad Hintz, who was a former chief financial officer for Lehman before becoming an analyst.