As the clock ticks down on Lehman’s (LEH) earnings report next week, the company is considering yet another plan to save itself. Taking a page from the banking crisis of the 1980s, Lehman is considering dividing itself into two parts; a “bad bank,” which would shoulder the lion’s share of Lehman’s toxic commercial real estate portfolio, and a “good bank” consisting of everything else. NYT:
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.
This idea has promise, although the devil is in the details. If Lehman lends the “bad bank” money, it could still be on the hook for the declining value of its real-estate related assets it is trying to get rid of. Also, given the state of the firm’s credibility, it may be tough for the “good Lehman” to raise the necessary equity on terms it is happy with. Lastly, shareholders who get shares of the “bad bank” will no doubt want a lot more detail about what they’re being saddled with than Lehman has yet to provide: If the news is bad, this disclosure could further undermine the company’s
Lehman is expected to post a horrendous quarter next week, with analysts predicting a writedown on the firm’s CRE book approaching $5 billion and an overall loss of $2.49 per share. By isolating its bad debt, Lehman would hope to be able to more freely raise capital at lower cost.
See Also: Tokyo Mitsubishi Bank (MTU): No Plans To Save Lehman (LEH)
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