The Back Alley Archives

Sept. 10 (Bloomberg) -- Lehman Brothers Holdings Inc., reporting the biggest loss in its 158-year history, said it will sell a majority stake in its asset-management unit, spin off commercial real-estate holdings and cut the dividend in an effort to shore up capital and regain investor confidence.

Lehman rose in New York trading after posting a $3.9 billion third-quarter loss on $5.6 billion of writedowns, worse than the $2.2 billion loss analysts had predicted. The company said it's auctioning off about 55 percent of the asset- management group, including fund-manager Neuberger Berman, and didn't name potential bidders. The real-estate spinoff is expected to be completed in the first fiscal quarter of 2009, according to a statement today.

``They are saying `we are fine now,' and that's buying them time to negotiate for that additional capital,'' Brad Hintz, an analyst at Sanford C. Bernstein in New York and former Lehman finance chief, said in a Bloomberg Television interview. ``They will need capital as part of the spinoff.''

Pressure on Lehman's Richard Fuld, the longest-serving chief executive officer on Wall Street, mounted yesterday after talks with Korea Development Bank ended, sending the shares tumbling 45 percent. Fuld is striving to convince investors that the fourth-largest U.S. securities firm will stem losses as housing prices decline. He and his management team also must keep clients and employees from leaving the company.

``This is an extraordinary time for our industry and one of the toughest periods in the firm's history,'' Fuld, 62, said in the statement.

WASHINGTON (Reuters) - A 45 percent slide in the shares of Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research, Stock Buzz), on concern it was struggling to raise desperately needed capital, stirred speculation that a U.S. government-sponsored rescue was increasingly likely.

The forced-sale of the Bear Stearns brokerage in March and the pre-emptive seizure Sunday of mortgage finance giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) has set a template that U.S. financial authorities might find hard to avoid.

Lehman, left as the smallest major U.S. independent investment bank after Bear Stearns' takeover by JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz), has a prominent role in many of the same markets that Bear Stearns had: interest rate swaps, credit default swaps and equity derivatives.

While the government would be very reluctant to intervene yet again, especially if it required taxpayers' money, several experts say there may be no alternative to avoid a systemic financial crisis.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke may be forced to act to preserve stability in the rest of the financial system.

"There is a risk that you could get the equivalent of a financial black hole and more people getting sucked in," said Robert Litan, a senior fellow in the economic studies program at the Brookings Institution in Washington.

Litan doubted Paulson or Bernanke wanted to go down in history books as an example of what not to do.

The tipping point of government intervention comes down to exactly how much counterparty risk exists with Lehman.

Several financial experts said Paulson, a former Goldman Sachs chairman, was likely calling friends on Wall Street asking what people know, who is exposed and how much loss they are willing to take.

"Clearly, as was the case with Bear Stearns, there's concern that there would be outstanding trades that would be problematic to unwind should a worse case scenario develop," said John Canavan, analyst at Stone & McCarthy Research Associates.

COUNTERPARTY RISK

The Fed already has a borrowing facility open to Lehman, a measure offered to investment banks after the Bear Stearns failure. But it is meant to ensure short-term liquidity and not prop up an insolvent firm.

Some experts said if the counterparty risk is deemed to be small enough, regulators could move away from the precedent they set with Bear Stearns and send a message that the investments are not too big to fail.

"It's a closer call," said New York University economics professor Lawrence White, who formerly served on the Federal Home Loan Bank Board. "I don't think there would be a big effect in the stock market... If (the counterparty risk is) relatively small, the Fed turns its back and says tough luck."

Concerns about the survival of Lehman have been circulating for months, causing its stock price to drop almost 90 percent this year. Lehman has complained that unfounded rumormongering by traders who profit from share price declines are behind the dramatic decline.

Lehman shares closed Tuesday down 45 percent at $7.79 on the New York Stock Exchange, and touched their lowest level since October 1998.

The stock tumbled after a report by Dow Jones Newswires that talks on a possible investment from Korea Development Bank broke down, citing the chairman of South Korea's top securities regulator, Jun Kwang-woo. A spokesman for the regulator denied the report, telling Reuters that Jun never made the statement.

The Dow article also quoted an unnamed government official as saying KDB had decided not to invest in Lehman.

A Lehman spokeswoman and representatives for the Federal Reserve and Securities and Exchange Commission declined to comment.

A U.S. Treasury Department spokeswoman said the department stays in touch with Wall Street on a regular basis. NYSE Regulation spokesman Scott Peterson said the exchange is monitoring trading in Lehman shares closely.

British banking giant Barclays has decided to walk away from talks to buy some or all of troubled US investment bank Lehman Brothers.

Barclays, whose negotiating team is led by Barclays Capital chief Bob Diamond, is in the process of informing Lehman and the Federal Reserve Bank of New York that it no longer wants to take part in the discussions because of the US government's unwillingness to guarantee Lehman's assets.

Although Barclays is understood to be happy that the New York Fed was leading discussions for Lehman's $41.8bn of property assets to be ring-fenced, it is unhappy with the fact that its balance sheet would still be on the block for all the remaining counter-party and other risks within Lehman.

Under UK Listing Authority rules, the third-largest British bank would have to hold a full shareholder vote if it were to provide such a guarantee itself, something that is obviously impossible to do given the race to secure a buyer as quickly as possible. The decision by Mr Diamond has been taken with the full knowledge of Barclays group chief executive John Varley and the rest of the board.

The surprise decision leaves a consortium led by Bank of America as the only potential buyer for Lehman, whose fate remains precarious. One source suggested that the move could be merely a negotiating tactic by Barclays to force US Treasury Secretary Hank Paulson to offer a guarantee.

A team of senior Barclays executives, including Bob Diamond and Jerry del Missier, the chief executive and co-president of Barclays Capital respectively, have been locked in talks aimed at finding an appropriate structure for a takeover of Lehman.

A Barclays spokesman declined to comment.

Bank of America Corp. abandoned talks to buy Lehman Brothers Holdings Inc., according to a person with knowledge of the matter, less than three hours after Barclays Plc said it wouldn't buy the faltering investment bank.

Bank of America, the biggest U.S. consumer bank, and Barclays, the U.K.'s third-largest lender, had been among the leading candidates to acquire all or parts of New York-based Lehman. The Wall Street Journal reported that Bank of America had entered into merger talks with Merrill Lynch & Co., citing unidentified people.

The two potential bidders pulled out amid a third day of emergency negotiations led by the U.S. Treasury and Federal Reserve. Leigh Bruce, a spokesman for London-based Barclays, confirmed in a phone interview today that his firm had withdrawn. Spokespeople for Bank of America didn't immediately return calls seeking comment.

The U.S. government is racing to find a solution for Lehman before markets open tomorrow, two people familiar with the situation said. Barclays walked away because it couldn't get guarantees from the government or agree on a private-sector deal to mitigate what it called Lehman's ``open-ended'' trading obligations.

Led by Chief Executive Officer Richard Fuld, Lehman may be forced to liquidate unless buyers step up for all or part of the 158-year-old company, U.S. Treasury Secretary Henry Paulson and Timothy Geithner, head of the New York Federal Reserve, told the chiefs of Wall Street's biggest firms at a meeting Sept. 12.

Banks and brokers today held a session for netting derivatives transactions with Lehman, or canceling trades that offset each other, in case the New York-based firm files for bankruptcy before midnight New York time.

``The purpose of this session is to reduce risk associated with a potential Lehman Brothers Inc. bankruptcy filing,'' the International Swaps and Derivatives Association said in a statement today. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the U.S. and abroad.

The step indicates that Wall Street lacks confidence that three days of talks to find a buyer for Lehman, held at the Federal Reserve Bank of New York, will be successful. Paulson, who has led the talks with Geithner, was adamant two days ago against using taxpayer funds in a resolution.

The fourth-largest securities firm until the past week, Lehman has thousands of such trades in credit, equity, commodity, interest rates and currency derivatives.

Sept. 16 (Bloomberg) -- JPMorgan Chase & Co. gave $138 billion this week in Federal Reserve-backed advances to the broker dealer unit of Lehman Brothers Holdings Inc. to settle Lehman trades and keep financial markets stable amid the biggest bankruptcy in history, according to a court filing.

One advance of $87 billion was made on Sept. 15 after the pre-dawn bankruptcy filing, and another of $51 billion was made today, Lehman said in court documents. Both advances were made to settle securities transactions with customers of Lehman and its clearance parties, according to the filing.

The advances were necessary ``to avoid a disruption of the financial markets,'' Lehman said in the filing.

The first advance was repaid by the Federal Reserve Bank of New York on the night of Sept. 15, Lehman said. JPMorgan said in a statement that the $51 billion advance was also repaid and the process will zero out the advances at the end of each day.