Wednesday, September 10, 2008

Lehman Posts Loss, Unveils Plan

Lehman posted a preliminary loss of $3.9 billion for the third quarter, much wider than the most pessimistic analyst estimates, and unveiled a restructuring plan in an effort to instill confidence in the wake of yesterday's 45% plunge in the stock.  The meat of the plan is to spin-off its commercial real estate assets to its shareholders and sell a stake in its prized asset-management unit.  The spin-off of the commercial real estate portfolio into a new company called Real Estate Investments Global accomplishes the task of stuffing shareholders with assets that they were hoping the bank would dump, but cushioning the investment bank from further losses in the portfolio.  Note to loyal shareholders: "Thanks! And you're wearing it!"  In the statement Lehman claims that REI Global's "primary focus would be to maximize shareholder returns by selling assets or holding them to maturity."  In my opinion, this is a fancy way to get around the indignity of having to mark these securities to market.  Furthermore, if anyone actually wanted these assets at the valuation that Lehman placed on them, Lehman would've gladly sold them and taken cold hard cash in return.
The investment bank is selling a 55% stake in a subset of its investment management division including asset management, private equity and wealth management.  It is in advanced discussions with a number of potential partners and will announce details of the transaction in "due course."  The asset management sale will be completed in an auction.  Given the recent performance of Lehman's stock price and the absence of alternatives to raise capital for the firm, I would bet that the potential bidders may be shaving a few bucks off of their bids.
In any event, the suspense is over.  Lehman has announced its plans, and investors have reacted with muted interest.  Although the stock has regained what it initially lost in pre-market trading, it is barely up after the precipitous plunge in the shares yesterday.  Continued declines in the stock show a lack of confidence and will be terrible for financials on the heels of yesterday's losses.  Prepare yourselves for yet another bumpy ride.

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