Wednesday, September 10, 2008

Lehman; With Begging Bowl

Lehman Brothers Holdings Inc.'s Richard Fuld, the longest-serving chief executive on Wall Street, is under increasing pressure to seal an agreement for a capital infusion and unload hard-to-sell mortgage investments after the company's stock suffered a record decline yesterday.

Lehman, the fourth-largest U.S. securities firm, issued a statement late yesterday, saying it will report third-quarter financial results today at about 7:30 a.m. in New York, a week earlier than planned. The investment bank also promised to disclose "key strategic initiatives.''

"Time is of essence to Lehman,'' said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania "It's all about momentum, which has been against them, and Fuld needs to reverse it before it snowballs into an avalanche that buries his firm.''

Lehman, which has lost 88 percent of its stock-market value this year, fell 45 percent in New York trading yesterday after talks with Korea Development Bank about a capital infusion ended. The Korean bank is one of several companies that Lehman has been in discussions with in recent weeks, a person familiar with the negotiations said, declining to name the other potential bidders.

South Korea's Yonhap news reported today that Korea Development is still in talks to buy a stake in Lehman for about $6 billion, citing an executive at the Korean bank it didn't name. Korea Development said in a subsequent e-mailed statement it has terminated talks with Lehman.

The New York-based bank was also continuing talks with private-equity firms including Kohlberg Kravis Roberts & Co. and Carlyle Group about selling its asset-management business, which includes fund manager Neuberger Berman, the person familiar with the negotiations said before Lehman released its statement yesterday.

Devalued Assets

Nomura Holdings Inc., Japan's biggest investment bank, may bid for a stake in Lehman, the Yomiuri newspaper cited Nomura President Kenichi Watanabe as saying last week. Michiyori Fujiwara, a Tokyo-based Nomura spokesman, declined to comment.

Lehman has been trying to raise capital and shed devalued real-estate assets that contributed to the firm's $2.8 billion loss last quarter and saddled the company with $8.2 billion in writedowns and credit losses in the past year. Analysts including Merrill Lynch & Co.'s Guy Moszkowski predict Lehman will report more writedowns and losses today.

Once the biggest U.S. underwriter of mortgage-backed securities, Lehman was stuck with the assets after two Bear Stearns Cos. hedge funds that invested in the instruments collapsed in July 2007, causing the market to freeze.


The ensuing credit contraction ultimately led to the takeover of Bear Stearns, once the fifth-biggest U.S. securities firm, by JPMorgan Chase & Co. in March for $10 a share in a deal backed by the U.S. Federal Reserve. Banks and brokerages worldwide have been forced to book more than $500 billion of writedowns and credit losses since the crisis began, and have cut more than 110,000 jobs.

Lehman, which employs about 26,000, is planning to cut about 1,000 jobs this month, people familiar with the matter said on Aug. 28. The firm has already shrunk its payroll by about 6,400, or 22 percent, in the past 12 months.

"Lehman still has 'lifelines' to reach for in order to avert the very scenario that brought Bear Stearns down,'' said Isabel Schauerte, an analyst at research firm Celent. "First and foremost among these is the sale of its asset management unit.''

U.S. regulators are likely pressing Fuld, 62, to make a deal to prevent the collapse of his firm, Egan said. Federal Reserve spokeswoman Michele Smith declined to comment. The Treasury is "in regular contact with market participants,'' spokeswoman Jennifer Zuccarelli said. The Securities and Exchange Commission is also monitoring, an SEC spokesman said.

'Willing Counterparty'

"The U.S. government cannot let Lehman fail because the systemic ripples would be too big,'' said James Hyde, a banking analyst at London-based European Credit Management Ltd., which oversees $27 billion for clients and doesn't own Lehman debt.

Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch, the three biggest U.S. securities firms, said yesterday after the close of regular trading in New York that they weren't backing away from their smaller rival.

"Goldman Sachs is a willing counterparty to Lehman Brothers across all our businesses,'' said Michael DuVally, a spokesman for Goldman. Spokespeople for Morgan Stanley and Merrill said their firms continue to trade with Lehman.
Citigroup Inc., the biggest U.S. bank by assets, UBS AG and Credit Suisse Group AG, the two largest Swiss banks, and BlackRock Inc., the biggest publicly traded U.S. fund manager, said they too continue to do business as usual with the firm.

Pressure 'Needed'

Lehman has about $65 billion in mortgage-related assets that are losing value with the collapse of the real-estate market. Most of the portfolio, about $40 billion, is tied to commercial real estate holdings, which Lehman may spin off into a new company dubbed "Spinco,'' people familiar with the matter said before the firm's statement yesterday.

Fuld, who was paid about $40 million last year when the firm posted record earnings, has resisted selling assets at fire-sale prices because he's focused on the size and global reach of his firm, said Richard Bove, an analyst at Ladenburg Thalmann & Co.

Lehman is the worst performer on the 11-company Amex Securities Broker/Dealer Index this year, and yesterday's share decline may force Fuld's hand, Bove said.

"Pressure needed to be brought in, and the stock price did that,'' Bove said. "If he doesn't move immediately, the decision is going to move beyond him to the government.''

S&P Outlook

Standard & Poor's said yesterday it may lower its A1 long- term rating on Lehman because the "precipitous decline'' in the share price creates uncertainty about the firm's ability to raise additional capital. S&P said Lehman's liquidity is "sound,'' noting the firm has the ability to borrow from the Fed through a lending facility the central bank put in place for brokerages after the demise of Bear Stearns.

Lehman's second-quarter loss of $2.8 billion was its first as a publicly traded company, prompting Fuld and President Bart McDade to say they will forgo bonuses for the year. Analysts surveyed by Bloomberg expect the firm to report a $2.2 billion third-quarter loss.

Founded in 1850 by three Jewish immigrants from Germany, Lehman has managed to avert previous potential disasters and is now among the handful of U.S. financial firms that have endured for more than a century.

On the Verge

Lehman has been on the verge of collapse at least four times: in 1929, when the stock market crashed; in 1973, when the firm lost $6.7 million betting on interest rates; in 1984, when internal dissension led to a takeover by American Express Co.; and in 1994, when newly independent Lehman faced a capital shortage.

Fuld started working at Lehman in 1969 after getting his bachelor's degree from University of Colorado. He rose through the ranks to become head of trading by the time the firm was sold to American Express, and, after a decade, he convinced the credit-card firm to spin Lehman off as a separate public company. He has been CEO since, and he remains one of the firm's largest individual investors, with about 3.4 million shares, according to regulatory filings.

Source - Bloomberg


Blogger Chus said...

This is what I think: Japan's Nomura Holdings

6:15 PM


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