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Lehman in sale talks as survival questioned-sources
Thursday September 11, 7:42 pm ET
By Patrick M. Fitzgibbons
NEW YORK (Reuters) - Lehman Brothers Holdings Inc was forced into talks about a possible sale after the Wall Street investment bank's shares plunged more than 40 percent on Thursday, raising questions about its survival.
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Lehman (NYSE:LEH - News) and U.S. regulators were in intensive discussions about a number of options, including a complete sale, but the firm was resisting government intervention, a source with direct knowledge of the talks said.
Even so, media reports said the government, including the Federal Reserve, was helping to broker a deal to sell Lehman that could be completed as soon as this weekend.
The U.S. government is hoping to avoid spending money on a bailout, a source with direct knowledge of the situation said.
Bank of America Corp (NYSE:BAC - News) or Barclays (LSE:BARC.L - News) could be suitors, according to various reports. Bank of America, Barclays and Lehman declined to comment.
Lehman Chief Executive Dick Fuld, long resistant of ceding the firm's independence, has been trying to sell just a part of the 158-year-old firm instead of the whole company, sources familiar with the situation said.
But investors, anxious for some kind of resolution, knocked down Lehman shares by 42 percent on Thursday as the dearth of information from the company stoked fears some clients and trading partners might take their business to more stable firms.
"Although many investors thought it would be avoided, customers of Lehman Brothers are becoming more and more skittish in their dealings with them," said William Lefkowitz, options strategist at vFinance Investments, a brokerage firm in New York.
Six months since the collapse and eventual fire-sale purchase of investment bank Bear Stearns, confidence in the Wall Street business model has faded.
Lehman stock closed down $3.03 at $4.22, and traded as low as $3.20 in after-hours trading. The shares have lost more than three-quarters of their value since Monday and more than 90 percent since they hit a 52-week high of $67.73 last November.
The crisis came on a difficult day for Lehman, the 7th anniversary of the September 11 attacks that severely damaged its headquarters across the street from the World Trade Center.
'LACK OF FAITH'
Lehman -- founded in 1850 by three German immigrants who traded cotton -- was the centre of the market's attention.
With Thursday's stock fall, its market capitalization fell to $2.93 billion, behind once much-smaller companies like Huntington Bancshares Inc (NasdaqGS:HBAN - News) at $3.04 billion and Raymond James Financial Inc (NYSE:RJF - News) at $3.8 billion. Goldman Sachs Group Inc (NYSE:GS - News) has a market cap of $61.8 billion.
"As much as they try to ... calm investors down, investors don't have yet the answers they need," said Rose Grant, managing director of Eastern Investment Advisors.
"There's a complete lack of faith, lack of confidence and lack of trust."
The problem with Wednesday's announcement from Lehman was that it did not convince investors the firm could sell assets at good prices and raise enough capital to restore confidence in its business.
"We thought getting news out of Lehman was going to clear the dark cloud, but it really doesn't. It just leaves us with a company that's limping along, that may or may not make it," said Arthur Hogan, chief market analyst at Jefferies & Co.
The company has written down billions of dollars in assets in the last year -- largely holdings of complex mortgage-backed securities.
And over the last several months, it has been battling rumors of defecting clients and talk of a discounted takeover.
"It's unfortunate that we're in the kind of position now where events can take over. The stock is telling us that Dick Fuld is running out of options," said Michael Holland, founder, Holland & Co, which oversees more than $4 billion.
"Unfortunately for Fuld, who has been very adamant about keeping Lehman independent, he has to find a partner now, someone to acquire them."
Lehman's survival may hinge on the sale of a 55 percent stake in Neuberger Berman, its asset management business. But not everyone is confident a deal will be consummated.
"We are not even sure that the auction process for 55 percent of their asset management group is going to work because the people that win the auction need to find the money to buy it," Hogan said.
While Lehman's 25,000-plus employees, who own about one-third of the company's shares, anxiously waited for word on their future, other businesses near its new midtown Manhattan headquarters were also concerned.
Lehman used to hold up to three corporate events a week at nearby Tonic Restaurant and Bar until earlier this year, then they cut back, said Joseph Jacobino, director of marketing and sales at Tonic.
"They scaled back dramatically -- to none," he said. "It was a significant loss for us."
For some, though, the problems have been a boon. Alison Ryan, a bartender at Tonic, said the last few days have been busy, as laid-off Lehman workers toasted each other.
WHITHER FULD?
Lehman's growing problems have led to questions about CEO Fuld, 62, and his strategy to get the firm on more solid footing.
"What you have is a loss of confidence in management, and they've got to start doing things instead of saying they're going to do things." said William Smith, president of Smith Asset Management in New York.
"I'm in shock as to how Fuld let this get away from him. From what I understand, the guy was a great executive."
Fuld won a reputation as a survivor and top-notch leader since coming to Lehman as a trader in 1969.
He endured in-fighting that led to the company's sale to Shearson/American Express in 1984 and was running Lehman when it was spun off -- undervalued and unwanted -- in 1994.
Fuld was considered one of Wall Street's ablest CEOs and was also one of Wall Street's best paid. In most years, he took home bonuses on par with those paid at much-larger rival Goldman. Last year, he received $22 million in compensation.
"Historically, Fuld has been someone you don't bet against when times get tough. This time, things may be too tough," said Holland. "The stock price is saying that."
For more on Fuld, see Reuters' newsmaker at (ID:nN10465879)
OTHER VIEWS
The Lehman worries were not just affecting the stock. Its credit protection costs soared to a record, and some of its bonds traded near distressed levels.
Lehman's bond prices tumbled, sending some yields well above levels widely considered as distressed. Its 4.25 percent notes due in 2010 were yielding 18.8 percentage points more than Treasuries -- almost twice the level that traders consider distressed -- according to data from MarketAxess.
Five-year credit default swaps traded at 650 basis points on Thursday, or $650,000 a year to protect $10 million of debt, widening 70 basis points from Wednesday's close, according to CMA DataVision.
On the commodities side, nervous futures clients of Lehman were pulling out their money. Lehman lost 22 percent of its Futures Commission Merchant assets last month, data from the U.S. Commodity Futures Trading Commission (CFTC) show.
ANALYSTS AND BUYSIDERS
Goldman downgraded Lehman's stock to "neutral" from "buy," and removed it from its Americas buy list on Thursday.
"Management did not successfully put to rest the issues that had been pressuring the stock," William Tanona of Goldman wrote.
Oppenheimer's Meredith Whitney said Lehman's initiatives were a "step in the right direction," but she continued to expect a tough 2008 for the investment bank.
Lehman faces challenges to earnings, given difficult capital markets for the next several quarters and potential write-downs of its remaining risk exposures, Whitney said.
On the buy side, uncertainty remained about the company's final plan or the strength of its credit ratings.
Moody's Investors Service, Standard & Poor's and Fitch Ratings all said they may cut Lehman's ratings after the firm's results. For details, click (ID:nN10659411)
"There wasn't anything there that we could rely on. They say they want to sell 55 percent of Neuberger Berman. That's great, but who is going to buy it?" said Helena Ocampo of Sentinel Advisors in Montpelier, Vermont.
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