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Lehman Makes Its Stand

Embattled Wall Street firm cuts mortgage exposure. But only a big investor can restore confidence.


With Lehman Brothers' stock price under pressure and growing doubts about its ability to survive, investors were hoping C.E.O. Dick Fuld would hit a home run today.

Instead, he scratched out a single at best.

Yes, Lehman announced steps that will significantly reduce its exposure to . But without a big investor or a big deal to ease worries about the need for new capital, those are only baby steps. The questions about the firm's strength remain.

It is still shopping 55 percent of its -management division, which includes its crown jewel Neuberger Berman. The firm said it was in talks with potential buyers. But reports of a possible sale have been circulating for nearly two months: The promise of a deal long foretold provides little cheer.

Lehman did say that it was in talks with BlackRock to sell its British residential real estate assets. And it is cutting its dividend.

More important, the firm is spinning off "a vast majority" of its commercial real estate assets, perhaps as much as $30 billion worth, into a new public company. The new real estate company will not use mark to market accounting, but its assets will be held to maturity.

"They are saying 'we are fine now,' and that's buying them time to negotiate for that additional capital," Brad Hintz, an analyst with Bernstein Research told Bloomberg Television. "They will need capital as part of the spin-off.'

The initiatives were outlined as Lehman reported preliminary third-quarter results a week early. As expected, it was ugly: a $3.9 billion loss, after taking write-downs of $7.8 billion on its portfolio.

"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 our client-facing businesses and returning the firm to profitability," Fuld said in a statement.

But the cost of insuring Lehman's debt surged early today, with five-year credit default swaps on the firm rising more than 100 basis points, according to Reuters.

Lehman was pressured to outline its strategic steps and release earnings a week early, after an extraordinary day when Lehman's stock price plunged 45 percent.

The firm had been in talks with the Korea Development Bank to raise fresh capital to cover some of Lehman's massive losses in mortgage-backed securities.

But those talks fell apart, and fears grew that Lehman would not have enough capital if it could not attract a new investor.

At one point Tuesday afternoon, Lehman shares traded for as little as $8, down more than 43 percent from Monday's closing price-and 88 percent off their peak of $66.58 as recently as February.

The stock was recently trading at $8.74 a share, down 38.2 percent on the day. It is at its lowest level in a decade, since losses in the Russian ruble crisis of 1998 last sparked speculation about Lehman's ability to survive.

Standard & Poor's said it may lower Lehman's short- and long-term credit ratings because the "precipitous decline" in the firm's share price has led to "heightened uncertainty about Lehman's ability to raise additional capital." S&P analyst Scott Sprinzen, however, characterized Lehman's near-term liquidity as "satisfactory."

The firm is the oldest on Wall Street, having been founded by Emanuel and Mayer Lehman in 1850.

Making a rare appearance on a quarterly results conference call, Fuld said that despite recent events, "employees of this firm have been holding up wonderfully."

"We've been through adversity before," he noted.

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