Lehman Brothers has been experiencing a lot of new developments in recent times.
After record losses drove its market capitalisation to a low of just over $10 billion and cost the jobs of the top management, the respected Wall Street institution received an offer for a fourth of the bank from Korean Development Bank.
Most surprisingly, the offer was worth $6 billion or almost a 100 per cent premium over prevailing prices. (See: Financial crisis claims jobs of Lehman CFO and COO and Korea Development Bank eyeing Lehman Bros)
That is just one of the options Lehman has in order to raise capital. Lehman is also considering selling its prized investment management arm, which includes Neuberger Berman, for about $7 billion, possibly to a private equity group like Apollo or Kohlberg Kravis Roberts.
Now, the bank is reportedly working toward a radical solution in its fight for survival - splitting itself into a ''good'' bank and a ''bad'' one. Lehman, which has been searching for a financial lifeline from outside investors, is contemplating placing about $30 billion of troublesome commercial mortgages and real estate that it owns into a new publicly traded company - the ''bad'' bank, nicknamed Spinco. The rest of Lehman - the ''good'' one - would then be able to carry on with the help of a cash infusion from one or more investors. (See: Lehman Brothers may go for $4 billion write-down in Q3, feel JPMorgan analysts)
The move is one of several under consideration as Lehman prepares to report what could be grim third-quarter results this month. But the good bank/bad bank idea is hardly new. Several troubled financial institutions took similar steps in the late 1980s and early 1990s.
If Lehman goes through with the plan, the firm itself would probably inject $6 billion to $8 billion in equity into the new company, people briefed on the matter said Thursday. Lehman would also provide debt financing for the company and could raise additional money from outside investors, who would benefit from any recovery in the market for commercial and residential real estate assets. A spokeswoman for Lehman declined to comment.
The Spinco proposal would enable Lehman to dispose of 80 per cent of its commercial mortgages, sources said. Under another plan, the firm would establish a company capitalized and managed by outside investors to buy some of its mortgage assets. The Spinco plan would enable Lehman's shareholders to benefit from a turnaround in the mortgage market.
Lehman's $65 billion mortgage-related portfolio has spooked shareholders, driving the stock price down 77 per cent this year on concern that the $2.8 billion loss in the second quarter wouldn't end the bleeding. The bigger portion of the portfolio, or $40 billion, is tied to commercial real estate.
Even though defaults of commercial mortgages are still below 1 per cent, speculation that delinquencies will jump in that market has pushed down the prices of the bonds backed by commercial real estate loans. By spinning off the mortgages to its own shareholders, Lehman can allow them to benefit from a possible recovery in asset prices when investors realize commercial mortgages aren't going the way of their sub-prime peers.