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Lehman Averts Disaster - For Now

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Embattled investment bank to sell assets amid mounting losses.

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Lehman Brothers (LEH) certainly won't go down without a fight.

Facing pressure to raise capital amid mounting losses and a plummeting stock price, CEO Dick Fuld announced a plan today to keep the investment bank afloat.

The company released its third-quarter results a week ahead of schedule to quell concerns it would become the latest casualty of the worst financial crisis since the Great Depression. Fuld also detailed plans to reduce exposure to mortgage-related assets, which continue to erode in value.

According to the Wall Street Journal, the last 3 months are evidence of ongoing turmoil in the credit markets and Lehman's struggle to remain solvent:

  • Net losses of $3.9 billion on $7.8 billion in write-downs.

  • Dividends cut from $0.68 to $0.05 per share, which should save almost $500 million per year.

  • Spinoff of "the vast majority" of its real estate exposure into a separate public entity, to be completed in the first quarter of next year.

  • Plans to sell 55% of its investment management business, specifically its coveted stake in asset manager Neuberger Berman, to generate over $3 billion.


The poor results reflect not only steep losses, but also dramatically slowing revenue from ongoing operations. Investment banking revenues were off 45% and investment management income was 25% lower than the same period last year.

These are undoubtedly dire times from Lehman, who faced -- and overcame -- similar pressures in the aftermath of the Long Term Capital Management crisis in 1998. Despite reassurances from trading partners like Goldman Sachs (GS) that clients are keeping their cash with Lehman, many on Wall Street fear the end is near for the 158-year-old brokerage.

Fuld, on the other hand, reassured investors on this morning's conference call that the initiatives will enable the company to continue operations as an independent company.

Remarkably absent from the heated debate over Lehman's future is discussion over whether the latest round of write-downs and asset sales represents the long-awaited "kitchen-sink" quarter, where the bank expunges all its bad assets to wipe the slate clean. Hopeful investors have been clamoring for such a recognition of losses since the credit crisis began last year, but to no avail.

What once began as a mortgage crisis became a credit crisis, then a financial crisis, and has now become a full-fledged economic crisis. The effects are reverberating around the increasingly connected global economy, from Korea to Pakistan, Mexico to Thailand, as one timezone's evening news flash is another's morning dose of disaster.

Time -- which by all accounts is the only way to heal the wounds of our battered financial system -- is the one option not readily available to troubled firms.

Lehman may succeed in averting disaster for now - but it may only be delaying the inevitable.

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No positions in stocks mentioned.

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