Lehman Desperate for a White Knight as Shares Continue to Tank

By , Money Morning •

By Jennifer Yousfi
Managing Editor

The Wall Street sharks are circling the bleeding balance sheet of Lehman Brothers Holdings Inc. (LEH) as the battered investment bank’s stock shed over 77% this week.

Lehman shares closed at $3.65 today in New York, down a staggering $12.55 for the week and bringing the one-time fourth largest Wall Street investment bank’s market capitalization down to just $2.53 billion.

“Lehman's financial flexibility has become more limited as its stock price has fallen to near all-time lows,” Moody's (MCO) Investors Service said, Forbes reported. Moody’s added, “The firm is experiencing a crisis of confidence.”

“A strategic transaction with a stronger financial partner would likely add support to the ratings and result in a positive rating action,” Moody's said.

Without a buyer, Lehman could find itself the victim of a Moody’s downgrade, which would cause Lehman’s capital requirements to increase. Lehman would have to come up with more cash to secure its balance sheet. At the same time, other parties would be even more skittish about doing business with the troubled firm.

The list of potential white knights is short, but includes several foreign firms that could use Lehman as a jumping off point to increase their global footprint:

  • Britain’s Barclays PLC (BCS)
  • France’s BNP Paribas SA (OTC ADR: BNPQY)
  • Germany’s Deustche Bank AG (DB)
  • And the United States’ own Bank of America Corp. (BAC)

While comparisons to the run on The Bear Stearns Cos. Inc. are rampant, any potential buyer of Lehman is unlikely to score the same deal this time around. Bear Stearns’ buyer JPMorgan Chase & Co. (JPM) received $29 billion in guarantees from the federal government to cover the riskiest of assets. But Treasury Secretary Henry Paulson says that won’t happen with Lehman.

“The government right now – Treasury and the [U.S. Federal Reserve] among others – they’re trying to work a deal with no government money, as they should,” Senator Richard Shelby, the top Senate Banking Committee Republican, said in an interview with CNBC television today. “A little money would be better than a lot, but no money at all by the taxpayers would be the best.”
 
Given the Treasury and Fed involvement in both the Bear Stearns bailout, as well as the rescue of struggling mortgage titans Fannie Mae (FNM) and Freddie Mac (FRE), many analysts feel that the government has set a precedent when it comes to bailing out public finance companies.

“It is about time” the government stop providing assistance, Allan Meltzer, an economist at Carnegie Mellon University in Pittsburgh and Fed historian told Bloomberg News. “The system can't work if the bankers make the money and the taxpayers take the losses. That is just not viable.”

The market found no reassurance in Chief Executive Richard Fuld’s announcement that the firm plans to sell off a majority stake in Neuberger Berman Management Inc., as well as sell off most of its commercial real estate holdings. The announcement coupled with an early release of Lehman’s fiscal third quarter earnings did nothing to reassure shareholders.

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 Fed 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 before its ability to do business is severely hampered by a potential ratings downgrade.

Avoiding taxpayer funds in the Lehman resolution would be “the ideal solution,” former Fed Chairman Alan Greenspan said in an interview with Bloomberg Television in Washington today (Friday). “Once you put the line under Bear Stearns, that whole structure of financial and non-financial institutions above that automatically became too big to fail,” he warned.

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