Posted by: Matthew Goldstein on September 8, 2008
Updated 1:28 PM (EDT)
The clock is ticking for Lehman Brothers. Lehman shares plunged more than 15% in early afternoon trading, as investors began worrying anew about the firm’s ability to raise billions in badly needed capital.
On Sept. 5, shares of Lehman closed sharply higher on expectation that the New York investment firm might soon announce a plan for getting its financial house in order—maybe as early as the morning of Sept. 8. But the only news investors got Monday was word of a management shakeup in Lehman’s fixed-income division. The press release announcing the staff changes made no mention of the firm’s attempt to find either a deep-pocketed investor, or a buyer for its Neuberger Berman asset management group.
With each passing day, Lehman’s hunt for a white knight is looking more desperate. The firm led by CEO Richard Fuld is expected to write-down up to $6 billion in bad assets in its just completed third quarter. Lehman has given itself a deadline for getting something done. The firm on Monday said it will report third quarter results on Sept. 18, two days after Goldman Sachs. Lehman, in a press release, said it will also discuss “key strategic initatives.”
But in an usual move, Lehman will report its results after the close of trading on Sept. 18. Most Wall Street investment firms usually report before the start of trading. Lehman probably has moved the release of earnings until after the close to give investors more time to consider the moves it’s taking.
It’s looking less likely, however, that a South Korean-owned bank will prove to be Lehman’s savior. South Korean regulators on Monday reiterated an earlier warning to the managers of the Korea Development Bank about sinking money into Lehman. The firm could still raise money by selling-off all, or part of Neuberger to outside investors. But analysts worry such a move would essentially leave Lehman with nothing but an ailing and poorly functioning investment bank.
Another option Lehman is mulling is splitting itself in two—a move that would hive-off some $40 billion in poor performing real estate-related assets into a separate entity. This so-called bad bank solution would require Lehman to find outside investors willing to put money into this new entity in the hope that the assets one day recover in value. Lehman also would have to sink capital into this new venture. But the trouble is Lehman doesn’t have that capital to spare right now. It also would have to take a substantial write-down on the value of any assets it puts in the new entity. Some Wall Street observers say given the magnitude of Lehman’s underperforming assets, the bad bank solution doesn’t seem feasible.
Either way, Wall Street knows Fuld needs to move fast because time is not on Lehman’s side. And whatever solution he announces on Sept. 18 must be sufficient.