By John Sexton
Troubled US investment bank Lehman Brothers yesterday reported a third quarter loss of US$3.9 billion and announced what amounts to a fire-sale of assets, leading to speculation that the US government may be forced to mount yet another rescue operation to avoid a crisis in the financial system.
The bank said its almost US$US4 billion third quarter loss, which follows a US$2.8 billion loss in the second quarter, was due to a US$7.8 billion write-down of commercial and residential mortgage and real estate assets.
Chairman and CEO Richard Fuld, who may have been guilty of understatement when he said Lehman Bros was facing "one of toughest periods in the Firm's history", announced a cut in dividends from US$0.68 to US$0.05 per share.
In further moves to restore the company's balance sheet, Fuld said Lehman was to sell a 55 percent stake in its Investment Management Division, including the Neuberger Berman wealth management business regarded as Lehman's prize asset, a sale that some say could raise as much as US$8 billion.
Lehman also plans to spin off its commercial real estate portfolio into a separate publicly traded company to be called Real Estate Investments Global in a move the bank says will remove the bulk of its commercial real estate exposure from its balance sheet. It also said it expects to complete the sale of US$4.0 billion of residential mortgage assets within weeks.
Rumors have been swirling around Lehman Brothers for months, but the current crisis was triggered by media reports that talks on a proposed investment by the Korean Development Bank had broken down. Lehman shares lost nearly half their value Tuesday to close at US$7.79, prompting the bank to bring forward its third quarter report by a week.
But Wednesday's announcements appear not to have convinced the markets and Lehman's shares closed down another 6.93 percent at US$7.25.
The major worry for the US government is counterparty risk, the extent to which other financial institutions that trade with Lehman may be left exposed should the company become insolvent.
Coming just days after the nationalization of Fannie Mae and Freddie Mac, and six months after the forced sale of investment bank Bear Stearns to JP Morgan, the crisis at Lehman Brothers has prompted speculation on Wall Street that the US government will intervene again to prevent contagion spreading throughout the financial system. The government may be reluctant to involve itself in yet another bailout, but the jury is out on whether it will have a choice.
(China.org.cn September 11, 2008)