Published September 11, 2008
Lehman to cut losses, says it's safe for now
After US$3.9b Q3 loss, the investment bank will spin off real estate arm, sell majority stake in investment-management division
By ANDREW MARKS NEW YORK CORRESPONDENT

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ONLY a few days after Wall Street was buoyed by the US government's plan to rescue and take over Freddie Mac and Fannie Mae, another major financial institution, Lehman Brothers, kept markets on a yo-yo.
Fears that it might default on its debt had sent the US stock markets into a swoon on Tuesday while Lehman's own stock slumped nearly 45 per cent. Yesterday, it sought to allay the worries by moving up the date of its earnings release by a full week, reporting in the early morning hours before the US markets opened that it expects to lose US$3.9 billion in the third quarter, and announcing that it plans to sell a majority stake in its investment-management division.
The company, which announced a cut in its annual dividend to 5 cents a share from 68 cents, also said it plans to spin off its commercial real-estate assets into a new company.
Lehman, the fourth largest investment bank in the US, has been seeking an outside investor for some time. Its hopes for raising new capital sank when the Korea Development Bank suspended talks to invest in Lehman, citing disagreements over the terms of the transaction and the condition of financial markets around the world.
However, the company's morning announcement appeared to allay fears on Wall Street yesterday, as traders reacted to Lehman's third quarter earnings pre-announcement and plans to raise equity with a round of buying that produced solid gains for the US stock market in the early going.
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The Dow Jones Industrials was up 71 points, or 0.62 per cent, to 11,302 at 10:15 am, after posting a 280 point, or 2.6 per cent decline on Tuesday. The S&P 500 was also rebounding yesterday, climbing 10.91 points, or 0.89 per cent, and the Nasdaq was up 22 points, or one per cent.
Lehman said it plans to spin off to shareholders US$25 billion to US$30 billion of its commercial-real-estate portfolio into a separate company, called Real Estate Investments Global. This will be publicly traded and will substantially reduce Lehman's remaining exposure to the troubled commercial real estate sector.
It is also in talks with Blackrock, the fund management group, to sell US$4 billion of the bank's UK residential mortgage portfolio. The sale is expected to complete within the next few weeks.
'The concentration of positions in commercial-real-estate-related assets has become a significant concern for investors and creditors,' Lehman said.
The Wall Street firm also said it intends to sell a majority stake, estimated at roughly 55 per cent, in a subset of its asset management business.
'This is an extraordinary time for our industry, and one of the toughest periods in the firm's history,' said Richard Fuld, Lehman's embattled chief executive, according to a company statement.
'The strategic initiatives we have announced today reflect our determination to fundamentally reposition Lehman Brothers by dramatically reducing balance sheet risk, reinforcing our focus on client-facing businesses and returning the firm to profitability,' Mr Fuld said.
Lehman's shares were up 7 per cent yesterday morning, and analysts said that Lehman, which also reported that it has cut its residential mortgage exposure by nearly half, had succeeded in reassuring investors that it's not in imminent danger of failure. For now.
'We're okay in terms of market sentiment until we get into the earnings season,' said Marc Pado, chief market strategist at Cantor Fitzgerald. 'There's going to be more we're going to have to deal with in terms of write-downs at the brokerage firms. The question for investors is whether the banks are largely done with their problems? That'll come out the third week of September, and the market will remain nervous until then,' Mr Pado observed.