Lehman chief in race against time

Stephen Foley
Monday 25 August 2008 00:00

Lehman Brothers chief executive, Dick Fuld, is in a race against time to rebuild the investment bank's battered balance sheet and set out a reason for the company to remain independent amid growing calls for new leadership or a sale of the company.

Mr Fuld, the longest-serving chief executive of an independent Wall Street bank, will this week redouble his efforts to find buyers for major assets, as Lehman prepares to close the books on another quarter of multibillion-dollar losses.

The company is hawking a stake in its profitable asset management business to private equity investors, and is in talks to sell some or all of its $40bn (£21.6bn) commercial property portfolio. Mr Fuld has also considered selling an equity stake in the overall group to sovereign wealth funds – the pools of capital amassed by emerging market governments.

All the talks, however, are bogged down in a dispute over value, with Lehman Brothers refusing to accept the knockdown prices on the table for its assets.

Shareholders hope that the stand-off will be broken before Lehman reports its third-quarter results in the middle of next month, when another hole is expected to open up in the company's balance sheet. With $60bn of mortgage-related investments still on its books, analysts believe that another $3bn-$4bn writedown could be on the cards.

The group's overall loss for the quarter could be $1.8bn.

The future of Lehman Brothers has become one of the central questions on Wall Street, where some of the most recognisable names in US finance are reeling from the effects of the credit crisis. Lehman has had the weakest balance sheet of all the independent investment banks since the smaller rival Bear Stearns went under in March.

Although an investor-relations blitz by Mr Fuld, giving analysts unprecedented information on the company's holdings and capital position, and a $6bn emergency fundraising in June have prevented a Bear Stearns-style crisis of confidence, investors are still demanding Lehman shrink its operations to reduce risks. With its once-lucrative business in mortgage-related bond trading now a shadow of its former self, Lehman's core operations are unlikely to soon generate a sharp reversal of fortune.

Last week, it was reported that Lehman had pulled away from selling a 50 per cent stake in the company to the South Korean government's Korean Development Bank after the failure to agree a price, but there is pressure on Mr Fuld to return to the table. Lehman shares jumped 15 per cent on Friday after the KDB said it was considering an outright takeover of a US investment bank, but it tried later to temper speculation it would make a hostile bid and Lehman shares ended up more modestly.

Dick Bove, the respected analyst at Ladenburg Thalmann, added to the pressure on Mr Fuld by suggesting that, if the chief executive refused to sell assets or a stake at current prices, shareholders could take matters into their own hands and encourage a hostile bid.

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