Lehman was forced to rush out its third quarter results today in a bid to reassure investors, after the collapse of its talks with Korea Development Bank sent its share price plunging yesterday. Unfortunately, it didn’t have much good news to report: the venerable Wall Street bank confessed to a loss of nearly $4bn, and gave no indication that another deep-pocketed backer was waiting in the wings. ‘An extraordinary time for our industry, and one of the toughest periods in the firm's history,’ CEO Richard Fuld called it.
It’s certainly been a rotten year for Lehman. The bank has taken a hammering from its dodgy sub-prime investments, leading to billions of dollars in losses and causing investors to desert it in droves. With observers worried that it was running dangerously low on capital, an investment from KDB (perhaps even a takeover) was seen as a crucial step to shore up its balance sheet – so the collapse of the talks sent its shares plunging by 45% yesterday. Hence the rush job on the results – although given how little cheer there was to report, perhaps it shouldn’t have bothered.
In a statement, the KDB said it was ending talks: ‘because of a disagreement over conditions of a transaction and considering domestic and foreign financial market conditions.’ The suggestion is that the two sides couldn’t agree on what the proposed stake was worth, and possibly disagreed about how bad things were going to get for Lehman, which apparently still has over $50bn of exposure to the fruitier end of the debt markets. We can understand that Lehman didn’t want to sell the family silver on the cheap, but some argue that any kind of deal would have been preferable to the current uncertainty.
For its own part, Lehman is slashing its dividend and launching a pretty radical shake-up: it’s selling off a majority stake in its fund management arm, spinning out its commercial real estate assets into a separate vehicle and flogging some residential mortgage assets (possibly a case of shutting the door after the horse has bolted, but still) – which will basically leave it as a pure-play investment bank. It also said it was ‘examining all strategic alternatives to maximise shareholder value’ – which basically means it’s putting itself up for sale to the highest bidder.
The market seemed to welcome all this, judging by its 7% share price gain today. Nobody seems to think Lehman’s about to go bust – but its chances of surviving as a stand-alone entity are looking increasingly slim...