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Lehman Sees Loss of $3.9 Billion and Plans Asset Sales
BEN WHITE
The investment bank, Lehman Brothers, in an all-out fight for its survival, said Wednesday morning that it expected a loss of $3.9 billion, or $5.92 a share, in the third quarter after $5.6 billion in write-downs.
The investment bank also said that it would spin off the majority of its remaining commercial real estate holdings into a new public company to be owned by Lehman shareholders. And it confirmed plans to sell a majority of its investment management division in a move that it expects to generate at least $3 billion and perhaps more. Lehman still hopes to receive a majority of the net income from the unit by retaining higher-margin businesses like its stakes in individual hedge fund groups.
After initially jumping on the news, Lehman shares fluctuated in morning trading and were up about 1.5 2 percent to $7.91 shortly after noon.
The new declines came after Lehman’s stock lost nearly half its value on Tuesday as investors feared it was running out of options to raise capital and shore up its ailing balance sheet. Shares in Lehman, a major underwriter of mortgage-related securities during the credit boom, are down over 90 percent since hitting their peak last year before the subprime mortgage crisis.
The tepid reaction to Lehman’s announcements suggested that investors were eager to hear fewer words from Lehman and see more action.
“To decrease investor uncertainty, Lehman must have a definitive agreement by Monday to either sell its profitable asset management business, Neuberger Berman, sell a large portion of its subprime real estate exposure, reduce its leverage ratios, or line up a deep-pocketed buyer to either buy the company outright or take a significant ownership stake — a lot to accomplish in three working days,” said Mark Williams, a management professor at Boston University.
Lehman said Wednesday that it hoped to complete the spinoff of around $32 billion in commercial mortgage assets by early next year.
Among other decisions, Lehman also said it would cut its annual dividend to 5 cents a share and that it remained committed to examining “all strategic alternatives to maximize shareholder value.”
“This is an extraordinary time for our industry, and one of the toughest periods in the firm’s history,” the chief executive, Richard S. Fuld Jr., said in a statement. “The strategic initiatives we have announced today reflect our determination to fundamentally reposition Lehman Brothers by dramatically reducing balance sheet risk, reinforcing our focus on our client-facing businesses and returning the firm to profitability.”
On a conference call, Mr. Fuld said Lehman has been tested many times in the past and survived.
“This firm has a history of facing adversity and delivering. We have a long track record of pulling together when times are tough and taking advantage of global opportunities,” he said on a conference call. “We are on the right track to put these last two quarters behind us.”
Analysts said the planned spinoff reflected the poor state of the commercial mortgage markets.
“It’s not a good sign,” said Brad Hintz, an analyst with Sanford C. Bernstein. “It’s really a sign of the illiquidity in the markets — that no one wants to buy these assets.”
And others warned that Lehman would face a plethora of questions about how it assigned assets to the new company.
“What’s a bad asset, and what’s a good asset, and what’s in the middle?” said Jonathan R. Macy, a professor at the Yale Law School who has studied the good/bad bank structure. “There have got to be judgment calls.”
Mr. Macy also expressed concern about what options the new company may have to put the bad assets back onto Lehman’s books.
Lehman’s announcement came a day after the bank’s shares plunged 45 percent following reports that its efforts to secure a strategic investment from Korea Development Bank had failed. Investors also feared that the federal government would not bail out Lehman as it has mortgage giants Fannie Mae and Freddie Mac and investment bank Bear Stearns.
The investment bank has been struggling amid growing losses on its commercial and residential real estate holdings. It has been shopping its prized investment management division, which includes Neuberger Berman. People with knowledge of the auction say Lehman has asked for final bids to be submitted by this weekend.
Lehman has been under heavy pressure since the collapse of Bear Stearns, as investors believe its heavy reliance on mortgage-related underwriting and trading could lead it to suffer the same fate that forced Bear into an emergency sale to JPMorgan Chase.
Lehman has steadfastly said that its balance sheet remained much stronger than Bear’s ever was and that it continued to have access to an emergency lending facility put in place by the Federal Reserve after Bear’s near collapse.
But Tuesday’s plunge of Lehman shares fanned worries about the troubles plaguing the broader financial industry and sent the Standard & Poor’s 500-stock index tumbling 3.4 percent. The decline more than wiped out the market’s rally on Monday, when stocks surged after the weekend rescue of Fannie Mae and Freddie Mac, the government-chartered mortgage finance giants.
There has been a growing sense on Wall Street that Lehman may have to solve its problems on its own. Since March, Lehman has been in a fight for its life, as some investors, including prominent short-sellers betting against the bank’s stock, questioned how the firm was valuing some of its assets. Lehman lost $2.8 billion in the second quarter and was forced to raise $6 billion in new capital. But investors were not placated, and the firm was compelled to explore more extreme measures.
Mr. Fuld has replaced virtually every major division head, including the firm’s president and chief financial officer.
During that time he has replaced the global head of fixed income — the division from which most of Lehman’s problems have arisen — twice.
But with every measure taken, Lehman’s stock price has fallen further.