Posted by: Matthew Goldstein on September 10, 2008
Richard Fuld used to be one of Wall Street’s titans. But the Lehman Brothers CEO now finds himself in desperate straits; essentially begging investors and clients to give him more time and one more chance to raise up to $7 billion in badly needed capital for his struggling investment firm.
A vicious plunge in Lehman’s shares on Sept. 9 forced Fuld into showing his hand early. Lehman on Wednesday announced a week ahead of schedule, a plan for raising capital by selling a majority stake in its Neuberger Berman asset management group and related businesses, and then using the proceeds from that sale to provide equity for a new spin-off company that will take ownership of some $30 billion in troubled commercial real estate assets. Lehman stockholders, who learned today that dividend on their shares would be slashed 90%, would get shares in the new publicly-traded real estate concern.
The trouble is none of the pieces of that Hail Mary rescue plan—much of which has been previously reported—are in place.
Lehman is still waiting on bids from a group of private equity firm for the asset management business. And the new spin-off company, dubbed Real Estate Investments Global, won’t come into existence before the first quarter of 2009, at the earliest. But that’s a long way off for the storied 158-year-old firm that has seen its share price tumble 87% this year to about $8.20. In mean time, Lehman continues to bleed red ink because of massive write-downs on its portfolio of troubled residential and commercial real estate assets. In the third quarter, Lehman took a $5.6 billion write-down on those troubled assets, resulting in a $3.9 billion loss—its second straight loss this year.
In a conference call with analysts, Fuld sounded weary and frustrated. Referring to the real estate-related write-downs, Fuld said, “the losses have clouded the underlying value of our franchise.’’ But it’s not clear if investors agree. Shares of Lehman, after jumping more than 8% in early trading on Sept.10, clicking fell back and were largely unchanged at $7.81 as of late morning.
What may be sapping investors’ enthusiasm is the enormity of the task ahead for Fuld. In tipping his hand, Fuld’s bargaining position with the private equity investors that he’s counting on to come up with the cash for Neuberger is severely weakened. Everyone on Wall Street now knows that Fuld is dependent on the cash from that deal to fund the new spin-off entity, which is vital to the survival of “core Lehman, or “clean Lehman,’’ as Fuld and others at Lehman repeatedly referred to the firm in the conference call.
There’s nothing stopping those private equity bidders for holding out now for the toughest terms. Private equity bidders may even demand that Lehman self-finance a portion of the transaction, just as the investment firm is doing with a planned sale of assets to BlackRock. In the conference call, Lehman executives reluctantly disclosed that they will finance up to 75% of the purchase price of some $5 billion in real estate assets its negotiating to sell to BlackRock. In these tough time, its become all to common for Wall Street firms to resort to so-called vendor financing to get buyers to do asset deals.
None of this is to say Fuld may not be able to pull it off. Lehman has one thing going for it that Bear Stearns didn’t, and that’s its ability to borrow funds from the Federal Reserve. But for now, the Fed borrowing is merely a temporary lifeline that lets Lehman stay afloat.