The pressure is increasing on Lehman Brothers Holdings Inc. to come up with a plan to restore itself to financial health – or possibly face the worst-case scenario of selling itself off in pieces at bargain prices.
The nation's fourth-biggest investment house is considered the most vulnerable amid the financial sector's continuing losses from the credit crisis. This week, Lehman has been the subject of analyst downgrades and projections that it will lose $4 billion in the third quarter. There is rising speculation – most of it negative – about its short-term prospects, leading more investors to bail out of Lehman stock, which closed Wednesday at $13.73, well off its 52-week high of $67.73.
Lehman needs to come up with a plan to purge itself of its risky mortgage-backed assets and raise new capital. But neither task is easy: Prospective buyers for those assets want to pay as little as they can get away with, and the big offshore investors that invested in Citigroup Inc. and Merrill Lynch & Co. months ago are wary about sinking more money into the financial industry.
What makes the situation harder for Lehman Chief Executive Richard Fuld is that Wall Street is still smarting from the near-collapse of rival Bear Stearns & Co. in March.
“If people think they (Lehman) are heading toward bankruptcy, nobody will want to do business with them or make them new loans. That's Fuld's biggest problem,” said Richard Sylla, financial historian and economist at New York University's Stern School of Business.
Fuld is said to be considering the sale of all or part of Lehman's investment management arm. That includes the highly profitable money manager Neuberger Berman, which it bought for $2.6 billion.
That business, with about $277 billion under management, could fetch between $7 billion and $13 billion, according to analysts. It would be the latest move by Wall Street to sell off assets, including last month's sale by Merrill Lynch & Co. of its stake in news and data provider Bloomberg LP.
Buyers could potentially include large private equity firms, which were among the bidders for Bear Stearns before it was taken over by JPMorgan Chase & Co.
A spokeswoman for Lehman Brothers declined to comment about a possible sale of the division.
Another Lehman option: secure funding from a sovereign wealth fund or another big institution. However, reports that a deal to raise $5 billion from South Korean investors fell through point to the caution among potential investors.
Global banks and brokerages have been forced to raise new capital after writing down more than $300 billion of mortgage-backed securities and other risky investments in the past 12 months. Lehman has more than $60 billion of exposure to real estate and mortgage-backed securities.