Clean Lehman

When seized by a panic attack, focus on breathing slowly and deeply. In response to a frenzied sell-off, Lehman Brothers dragged forwards its third quarter earnings release, hoping to buy itself a little respiratory space. It should suck in oxygen quickly. The new strategy, perhaps by virtue of its rushed publication, is incomplete.

Plans to sell a majority stake in its investment management arm, spin off $25bn to $30bn of commercial real estate assets and reduce residential exposure further through a deal with Blackrock, remain just good intentions. Slashing the dividend to save $450m a year is at this point nothing more than a token gesture.

Even confirming these measures of last resort may not be enough to assuage investors’ palpable fears – after this week’s pummelling, the stock barely held flat on Wednesday.

The price of insuring the bank’s debt continued to rise. If Lehman secures a quick, well-priced sale of its asset management stake, it should generate a profit to offset the writedowns being taken against real estate assets to be spun off. The bidders, though, clearly have all the negotiating power.

The prospect of further writedowns, and the need to capitalise “Spin Co” to the satisfaction of the ratings agencies, means further capital raising cannot be ruled out. Lehman will be debt-financing the new entity, and it has its own rating to think about.

Lehman has reduced its real estate exposure and leverage, but not rapidly enough to suppress doubts about its viability. It now has perhaps six months to complete its reinvention.

As US financial stocks crashed again on Wednesday, that appears challenging. The management celebrates the revenue streams from the investment banking business hurt by real estate writedowns. But Lehman’s ball and chain is also its anchor as an independent company.

Once shorn of its property portfolio, the anodyne but solid “Clean Lehman” is primarily a streamlined, fixed-income franchise, just as it was in the late 1990s. Back then, of course, it was a perennial takeover candidate. It probably will be again.

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