Straits Times: Lehman may split into good and bad

Ailing bank’s survival plan is to move its troubled real estate assets to new firm

NEW YORK: Lehman Brothers, the ailing Wall Street bank, is working towards a radical solution in its fight for survival: Splitting itself into a ‘good’ bank and a ‘bad’ one.

Lehman, which has been searching for a financial lifeline from outside investors, is contemplating placing about US$30 billion (S$43 billion) of troublesome commercial mortgages and real estate that it owns into a new publicly traded company – the ‘bad’ bank.

The rest – the ‘good’ one – would then be able to carry on with the help of a cash infusion from one or more investors.

The fate of Lehman is one of the biggest questions hanging over Wall Street, where concern about the health of the financial industry and the broader economy sent the Dow Jones Industrial Average into a 345-point tailspin on Thursday.

Lehman, among the largest underwriters of mortgage-backed securities, has been brought to its knees by the running credit crisis.

Analysts expect the firm to write down as much as US$5 billion of commercial real estate holdings and to post a loss of US$2.49 a share at its third-quarter results briefing next week.

The firm’s hard-charging leader, Mr Richard S. Fuld Jr, has been trying to sell some of the bank’s troubled commercial mortgage holdings, but has failed to find enough buyers.

The bank has also been negotiating to sell part of itself to the government- owned Korea Development Bank or other investors in Asia. While no deal has been reached, many analysts think one will materialise soon.

The good bank/bad bank idea is hardly new. Several troubled financial institutions took similar steps in the late 1980s and early 1990s.

If Lehman goes through with the plan, the firm itself would probably inject US$6 billion to US$8 billion in equity into the new company, people briefed on the matter said on Thursday. It would also provide debt financing for the firm and could raise additional money from outside investors, who would benefit from any recovery in the market for commercial and residential real estate assets.

Splitting off troubled assets would help Lehman attract new investors, many of whom have been reluctant to put money into the troubled financial industry.

Creating the separate company, the thinking goes, would also strengthen the confidence of people who do business with Lehman every day – other banks, hedge funds and institutions like pension funds – thereby encouraging them to continue doing business with the firm.

Shareholders, who would own shares of both the real estate portfolio and the new unencumbered Lehman, could bet on whether the commercial real estate market recovers or gets worse and sell their ‘bad bank’ shares.

Source: Straits Times – 06 Sept 2008