Thursday, September 11, 2008

Is Lehman Close To Selling Itself?

There are rumors making the rounds that Goldman Sachs (GS) is in talks to buy (or save) Lehman. I don't know if it is true or not, but Lehman is now in sad shape. Here is an interesting story that I received this morning:

-- Lehman Bros. Chief Executive Officer Richard Fuld continued his high-wire act to try to save his firm Wednesday. Before the market opened, Lehman said that it was looking at a net loss of $3.9 billion for its preliminary third quarter results, following the $2.8 billion loss announced for the bank's second quarter. Estimated net revenues were $2.9 billion, Lehman said.

On a conference call, Fuld tried to reassure Wall Street that Lehman was doing the right thing. "When you look at our segment businesses, you'll see that our client relationships remain strong," Fuld said. However, he acknowledged that the firm could not put the continued trust of its clients, counterparties and employees at risk. "It will be best to protect the core client franchise," Fuld said.

Lehman said that it remained committed to examining all strategic alternatives. Translation: Lehman may be up for sale. "I have always said that if anybody came with an attractive proposition that made it compelling for shareholder value, that would be discussed with the Board and evaluated," Fuld said.

Before the third quarter estimates were released, Ladenburg Thalmann analyst Dick Bove said he didn't believe Lehman is headed for insolvency because of the strength of its core businesses. The problem with a sale, Bove said, is the difference between what management believes the firm is worth and what the market is willing to pay.

"The argument is over value and the seller, in this case Lehman, is saying, we're good enough that we need book value and the buyer is saying, you've got to be out of your mind when the market is saying, $8 [per share]," Bove said. "I think HSBC would be a potential buyer because it wants to be a major player in the capital markets," he said.

Lehman decided to release its results a week early after its stock dropped more than 40% on Tuesday for a final close of $7.79 per share. The precipitous decline in stock price followed news that state-owned Korean Development Bank had pulled out of talks to provide Lehman with a much-needed capital infusion.

On Tuesday, Wall Street fellow banks, Citi, Goldman Sachs, Merrill Lynch and Morgan Stanley said they continued to do business with Lehman. Those statements were made with the memory of Bear Stearns whose shotgun sale to JPMorgan Chase in March was precipitated by counterparties pulling their business. Lehman's writedowns for its asset-backed securities in the third quarter total $7.8 billion. That comes on top of a $3.6 billion writedown in the second quarter and about $4.7 billion in the first.

The firm also announced a number of ways it intended to deal with the kind of mortgage-backed securities that have been dragging it down. It is setting up, Real Estate Investments Global, a publicly traded company to spin off $25 billion to $30 billion of its commercial real estate portfolio. It is also selling about $4 billion of the firm's U.K. residential mortgage portfolio in conjunction with asset manager BlackRock. When that deal goes through, Lehman said its exposure to residential assets would be reduced by 47% to $13.2 billion.

Short sellers, including Greenlight Capital founder David Einhorn, have said for months that Lehman had a long way to go before it will have written down all the illiquid securities on its books. Lehman also said it intends to sell a majority stake of its profitable investment management arm Neuberger Berman. Private equity firms Kohlberg Kravis Roberts, Hellman & Friedman and Bain Capital are said to be bidding on the division. That sale will not include Lehman's minority stakes in hedge fund firms, Chief Financial Officer Ian Lowitt said on the conference call.

Bove faulted Fuld for not reacting sooner and more aggressively to the crisis at Lehman. "Now, because of that stubbornness, the company has lost total control of its destiny," he said. "Fuld cannot be trusted; he has precipitated a crisis not only for Lehman but also for the financial system."

long GS


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