Recent reports have noted that Lehman Brothers is shopping its highly regarded Neuberger Berman investment management unit and trying to offload billions of dollars in real estate loans which it holds in what may be a desperate attempt to survive. There have been serious concerns about Lehman’s viability since at least March, 2008. Lehman, the fourth largest U.S. brokerage firm, is not only smaller than its competitors, it was also a big player in the mortgage market which has been at the center of the current credit crisis. Concerns were heightened in June, 2008, when Lehman announced a quarterly loss of $2.8 billion, its first quarterly loss since going public.
Lehman Brothers’ financial woes continue to mount despite its valiant efforts to plug the dike over recent months. Lehman has already dumped billions of dollars of holdings, raised capital and cut expenses this year in an effort to shore up its balance sheet. Lehman has reduced its payroll by approximately 6,400 employees or approximately 22% of its workforce. Furthermore, it has been reported that it is preparing to eliminate as many as 1,000 to 1,500 additional jobs.
Unfortunately, all of these actions may be for naught. According to David A. Hendler, of Creditsights, Lehman Brothers will report a quarterly loss of between $4 billion and $6 billion which would require significant additional asset sales in order to maintain its capital base.
Lehman faces an array of additional problems in moving forward. There are many uncertainties about the real value of its assets. The firm has large amounts of hard to value assets, the ultimate value of which may be subject to much debate. Merrill Lynch’s recent sale of collateralized debt obligations underscores this concern. In late July, Merrill sold $30.6 billion of collateralized debt obligations to Lone Star Funds for $6.7 billion or roughly 22% of face value. Moreover, Merrill had to finance 75% of the purchase price in order to consummate the deal.
Lehman’s legal exposure is also a concern. The firm is reportedly under investigation for its sale of auction-rate securities and will have to deal with that problem. Similarly, the extent of the firm’s exposure arising from its sales of mortgages, structured finance products, other derivatives is unknown.
According to recent reports, Lehman is aggressively exploring the sale of all or a part of the firm. Korean Development Bank and HSBC have been identified as interested parties.