Lehman reveals rescue plan and $3.9bn record loss

'We have been through adversity before and always come out a lot stronger,' said CEO Richard Fuld

• David Teather in New York
• guardian.co.uk,
• Wednesday September 10 2008 18:00 BST
• Article history

CEO Richard Fuld is under pressure. Photograph: AP

Lehman Brothers today attempted to rebuild shattered confidence in the bank, rushing out its third quarter results and outlining a series of measures to raise cash and sharply reduce its exposure to the ailing property market.

The bank said it had lost $3.9bn (£2.21bn) in the third quarter, chiefly owing to a further $5.6bn of write downs related to its commercial and residential property investments.

In a hastily convened conference call, Lehman chief executive Richard Fuld said the bank would continue to examine other strategic options, which analysts said was akin to putting a "for sale" sign above the business.

Fuld described the current crisis as "an extraordinary time for our industry and one of the toughest in the firm's history," but said the bank would pull through. "We have been through adversity before and always come out a lot stronger."

Lehman had been scheduled to publish its third quarter figures next week but was forced to bring the announcement forward as fears the bank could be the next victim of the credit crunch sent its shares 45% lower on Tuesday.

The bank intends to spin most of its commercial property assets, around $30bn, into a separate company and is selling off $4bn of its UK residential mortgage portfolio to the private equity firm Blackrock.

The bank is also slashing its year end dividend from 68 cents to just 5 cents, a move that will save $450m. Lehman said it has reduced its global headcount by around 1,500 workers over the past quarter.

The embattled investment bank is also in advanced talks to sell off a 55% stake in its lucrative investment management division, which includes the asset manager Neuberger Berman. Analysts reckon the division is worth about $10bn.

The moves Fuld said had "quickly derisked and resized" the firm. "We will have what we believe to be a strong and clean balance sheet that will allow us to focus on our core client businesses."

The market has been on high alert since the near collapse of Bear Stearns in March and fears for the future of Lehman Brothers had wiped almost 300 points off the Dow Jones industrial average on Tuesday.

Wall Street suffered further volatility early in the day and was trading 74 points higher at midday. Lehman shares were up 22 cents at $7.99, although credit default swaps, the instruments that provide a type of insurance on its debt, widened, suggesting that concerns remain.

The latest focus for anxiety was Washington Mutual — its shares were down more than 25% after being downgraded by the credit rating agency Standard & Poor's.

The sharp fall in Lehman shares on Tuesday had been sparked by a report that talks had broken down with a potential investor, the Korea Development Bank, and that its options for raising much-needed capital were running out.

KDB, which is owned by the South Korean government, today confirmed that it had pulled out of talks. In a statement, it said the decision had been due to "disagreements over transaction terms and in consideration of the state of financial markets at home and abroad".

Lehman has had failed talks with at least two other firms.

The bank said it had already been reducing its exposure to property but felt the need to accelerate its efforts to extract itself from the market.

Including the Blackrock deal, it has now reduced its exposure to residential property by 47%. It said it expects the sale to Blackrock to be completed within weeks.

It intends to spin-off its commercial real estate division, to be called Real Estate Investments Global, in the first quarter of next year.

The gross write-downs included $5.3bn on residential mortgages and $1.7bn on commercial real estate positions — offset partly by hedging.

The loss was the Lehman's largest since going public in 1994 and followed losses of $2.8bn in the second quarter.

Cubillas Ding, senior analyst with Celent, a Boston-based research firm, said; "Lehman Brothers' latest results continue to open up what's inside Pandora's box and it's not pretty. The risks that the firm had taken on within the real estate markets and related investments seems highly concentrated."

He said the bank had been forced to make "hard decisions" now that the "various options on the table had narrowed and balance sheet concerns start to bite".

Asked if he would consider a buyer for the entire bank, Fuld responded: "I have always said that if anybody came up with an attractive proposition that made it compelling for shareholder value, it would be brought to the board and evaluated and that has not changed."