A Chinese flag flutters outside the New York Stock Exchange in honour of the Beijing Olympics. Wags wonder, however, if it merely confirms a trend in the ownership of Wall Street. Lehman Brothers, at least, appears to be holding out. Talks to sell a stake in the bank to Chinese or South Korean state-backed investors have broken down at the last minute.
Holders of Lehman’s battered stock have two reasons to groan. First, Lehman could do with the cash. Further writedowns are expected when the bank reports its third quarter earnings next month. Merrill Lynch estimates a 15 per cent markdown on the $29.4bn commercial mortgages portfolio – said to be for sale – would push Lehman’s pro-forma Tier 1 capital ratio down to just 9.2 per cent.
Lehman’s options are narrowing. It has raised almost $14bn this year, while its market capitalisation has dwindled to about $9bn. Reports of a possible sale of the asset management business – which in theory should be worth more than Lehman’s entire present market value – further highlight the urgency of the situation.
These days, if you cannot cut a deal with Asia’s government-backed investors, alternatives look scarce. Shareholders deserve an explanation. Lehman was reportedly putting a value on itself of 1.5 times book value – equivalent to perhaps $40 to $50 per share – that represented a multiple of the bank’s current share price, recalling levels last seen prior to the collapse of Bear Stearns.
Wall Street’s core advisory and trading businesses are slowing, so organic recovery looks some way off. Lehman still suffers the biggest exposure of its peer group to troubled property and derivatives assets – any talk of taking advantage of “opportunities” rings hollow. For shareholders faced with potential dilution and anaemic business, the logic for selling is compelling.
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