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Lehman's Fuld Goes Begging

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.

Reader Comments


September 10, 2008 11:50 AM

Wow-- interesting article!

Ed Norton

September 10, 2008 12:52 PM

The revival of Lehman has been managed like one of Ralph Cramdens hair brain schemes. Sell Neuberger, create a bad bank/good bank, call Kim Jung II, fire some managers, sell the UK real estate assets...Humina Humina Humina...Hey Lehman: “When the tides of time turn against you, And the storms of life sink your boat, Don’t cry and scream and holler, Just turn on your back and float.” Ed Norton


September 10, 2008 1:44 PM

Just a SNAFU - Situation Normal all Fuld up.


September 10, 2008 2:04 PM

Fuld should really come forward more often and speak and that should be the best way to stop rumours surrounding the firm. A transparent firm will definitely gain public sympathy and investors would be more than willing to see a bright future for lehman. The problem right now is that Lehman has created a thick blanket of fog, which does not allow others to peek in and this same fog is been used by short sellers to make money. If the firm wants to be public, if it wants to stand on the 7th Ave of the shining New york city then its high time it become completely transparent. In my opinion Fuld is doing a good job, but ensuring transparency would just make it great.


September 10, 2008 7:42 PM

Can you say "DEFLATION"? Come on, I know you can. Just repeat after me D.......E...........F.....L........A......T......I.....O.....N.

Get used to that word - Deflation - it's the new Black.


September 10, 2008 11:37 PM

Fuld is having to face up to the other side of a bubble: a precipitous slide down. He rode the lie of the real estate boom up and he never thought it would end. Now that the bill is coming due for all the financial chicanery these CEOs pulled for so long. Of course, Fuld will still have millions of dollars he made while running Lehman into the ground. The same cannot be said for all the poor saps who lost their hind ends as a result of such foolishness and straight up thievery.


September 11, 2008 7:21 AM

Lehman is dead man walking. Reckless silly risk takers tought party wont end and now it is time to face consequences.


October 2, 2008 9:45 AM

What recourse is there for LEH stockholders? All other companies were bailed out, why not Lehman? Employee stockholders had 0 basis, but recieved stock for honest work. Shouldn't they at least receive enhanced tax relief for their losses?


October 3, 2008 6:37 PM

"ex post", even if lehman now we know lehman was a horrible black hole, well, with 40/50 billions given from the fed we could have avoid all succeded the days after.....this is a mistery: why lehman was not bailed out ?? I presume mr.Bush and all his gang have a lot of blame....


October 10, 2008 3:21 PM

" I will go to my grave wondering how someone can make as much money as Mr. Fuld and still feel such a sense of entitlement that the American Taxpayers and government should bail out his firm?!!"

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