Lehman's Early Earnings Do Little to Quiet Market Fears

By Jennifer Yousfi
Managing Editor

In a move to reassure spooked investors and curtail a crisis of confidence, Lehman Brothers Holdings Inc. (LEH) moved up its third-quarter fiscal earnings release to early yesterday (Wednesday) morning.

One day after Lehman stock plunged 45% for the day, dragging the investment bank's market cap below $6 billion, Chief Executive Officer Richard Fuld unveiled the plans he hopes will restore shareholder confidence and allow Lehman to remain an independent entity.

Lehman will auction off a 55% stake in its investment manager, Neuberger Berman Management Inc. Lehman also plans to spin off most of its commercial real estate portfolio to shareholders by forming a new entity, Real Estate Investments Global.

But without a firm offer on the assets up for bid, investors were nonplussed with the announcement. Especially considering Lehman's third-quarter loss of $3.9 billion on another $7.8 billion in mark-to-market write-downs - its largest quarterly loss to date - was almost double what analysts had expected.

Lehman shares hit a new 52-week low of $6.93 yesterday, before recovering slightly to close down 54 cents for the day, a decline of 7%, at $7.25. 

And with each drop of the stock, Lehman becomes more affordable and more attractive to a foreign financial institution that could be looking to broaden its U.S. footprint. With its market cap sitting at just $5.03 billion, Lehman is at risk for a takeover - hostile or otherwise.

"What they need to do is reassure the market they aren't running out of time," Sanford C. Bernstein & Co. LLC analyst Brad Hintz, a former Lehman finance chief, said Wednesday morning on Bloomberg television.

Based on the market's reaction, the earnings release this morning wasn't enough reassurance. However, one development that could save Lehman from going the way of Bear Stearns Cos. and allow the firm to remain independent, is the Primary Dealer Credit Facility the U.S. Federal Reserve announced after the run on Bear Stearns in mid-March. The ability to borrow directly from the central bank could buy Lehman enough time to find a capital infusion to shore up its liquidity position.

"The PDCF could be used to keep Lehman operating until a broader solution was found," Brian Sack, a former Fed research manager who's now senior economist at Macroeconomic Advisers LLC in Washington told Bloomberg News. "The challenge is figuring out what the broader solution is."

And while the details of that solution have yet to be found, analysts seem certain that someone will come to Lehman's rescue, whether it is through a corporate investment, or yet another U.S. government-sponsored bailout.

"Given what was done with Freddie and Fannie and Bear Stearns, it's hard to distinguish why Lehman is not too big to fail as well," Robert Eisenbeis, chief monetary economist at Cumberland Advisors, and a former research director at the Atlanta Fed, told Bloomberg. "My guess is that everyone will blink again and Lehman too will be saved. We are in for a rough ride."

News and Related Story Links:

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