Lehman Announces $3.9 Billion 3Q Loss, Will Sell Off Assets to Raise Cash

Sept. 10, 2008 — -- Lehman Brothers Holdings said today that it lost $3.9 billion in the third quarter and announced a plan to sell some of its assets to raise cash, a move that comes after months of heavy losses related to the mortgage crisis.

In a statement released this morning, the company announced that it would spin off much of its troubled real estate portfolio into a new company and also sell a majority stake in its investment management division, including Neuberger Berman, a profitable division of Lehman that manages mutual funds and private wealth. In addition, the company said it was in talks with BlackRock Financial Management Inc. to sell about $4.0 billion of its United Kingdom residential mortgage portfolio.

Lehman's multi-faceted plan and its earnings report -- which was released a week ahead of schedule Wednesday morning -- hasn't satisfied Wall Street so far. By mid-morning Wednesday, the share price for Lehman Brothers Holdings Inc. teetered around $8, not high above where Lehman's stock price settled the day before after falling more than 40 percent.

Investors are still worried that Lehman, the country's fourth-largest brokerage firm, still might not be able to save itself from failure, said Douglas McIntyre, the editor of the financial Web site 247WallSt.com.

"People are looking at what Lehman did -- spinning off a dangerous part of their business, selling a majority in their money management firm -- that's a lot of fairly good stuff," McIntyre said, "but the market is saying it isn't enough. The mortgage market and the derivative market is so bad that even if you do all that, there's still a lot of risk."

Lehman's spin-off, to be called Real Estate Investments Global, will include $25 billion to $30 billion of its commercial real estate portfolio, the company said.

"The concentration of positions in commercial real estate-related assets has become a significant concern for investors and creditors," the company said in a statement. "Therefore, Lehman Brothers believes that it is in the best interests of all its constituents to separate these assets from the rest of the Firm.

Isolating its troubled real estate assets into a separate entity is a strategy some analysts have called a "good bank/bad bank" solution. The "bad bank" would hold the troubled assets.

"Fundamental accounting says you can't make the bad assets disappear -- they have to wind up somewhere," said Lawrence J. White, an economics professor at New York University's Stern School of Business.

The move, he said, could give Lehman some "organizational gains" by allowing the new company -- Real Estate Investments Global -- to focus squarely on making the most of its ailing portfolio.

White said that Lehman's sale of the stake in its investment management division could help the bank provide capital for the spin-off.

"It provides the net worth so as to allow it to be a feasible transaction," he said.

White said that if Lehman didn't resolve its asset problems, the government could eventually step in to shore up the bank like it did Bear Stearns. In March, the failing investment bank was purchased by JP Morgan in a $240 million deal backed by the federal government.

Not everyone agreed that Lehman could be subject to a Bear Stearns-style treatment. Bear's bailout happened under "very narrow circumstances," said Peter Wallison, a senior fellow at the American Enterprise Institute, a conservative think tank.

At the time of the Bear Stearns rescue, he said, many major financial institutions were considered to be unstable. If the government hadn't intervened and Bear Stearns had been allowed to fail, he said, there would have been a run on banks around the world.

Since then, Wallison said, financial institutions have made adjustments that would allow them to weather another bank failure. If Lehman did fail, he said, the same kind of domino effect would be unlikely and government intervention would not be as necessary.

"I don't see a real danger in the same kind of panicky run on financial institutions," he said.