Lehman Must Convince Wall Street it Can Deliver

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NEW YORK - Lehman Brothers Holdings Inc. has presented its rescue plan, now it has to convince Wall Street it can make good on its promises.

On Wednesday, the 158-year-old investment bank outlined a blueprint to sell off its well-respected investment management unit and spin off its commercial real estate assets. The strategy is part of a last-ditch effort to rescue the investment bank from bad bets on real estate-related holdings that have already laid low other storied Wall Street firms.

Lehman Chief Executive Dick Fuld, 62, the longest serving CEO on Wall Street, also said the firm would examine all other options — including a sale of the company he joined right out of college.

For investors, the strategy seemed long on hope, short on details and raised questions about timing and execution, analysts said. Investors had hoped to see a solid plan in place to offset almost $6.5 billion of losses during the past two quarters.

Lehman's shares fell 54 cents, or about 7 percent, to $7.25 on Wednesday. They shed 4.5 percent more in after hours trading, after dropping about 45 percent on Tuesday.

Wall Street's uncertainty also showed up Wednesday in the cost for insuring Lehman's debt against default. The insurance, known as credit default swaps, rose to 6.10 percentage points from 4.75 percentage points after Lehman rolled out its strategy. Those insurance costs are now greater than those of former rival Bear Stearns shortly before was rescued by a Federal Reserve-backed plan in March.

The nation's fourth-largest investment bank plans to sell a 55 percent stake in its investment management division, which includes its prized Neuberger Berman asset management unit. Lehman said it is in advanced talks with several bidders, but refused to give a timeline about when a deal would take place.

Investors were discouraged that no buyer had been named. Lehman began pitching a deal to private-equity firms two months ago. Analysts believe the sale could fetch about $3 billion.

"This is agonizing for shareholders," said Mark Williams, a professor of finance at Boston University School of Management. "Fuld was supposed to have a war room started in March, when Bear Stearns nearly collapsed, to solve these problems, and at this point he has failed miserably."

Arrayed against the plan: The current financial crisis shows no sign of ending soon, credit conditions remain tight and big acquisitions are rare. Big institutional investors — like state-owned sovereign wealth funds and private-equity firms — aren't as willing to make major investments.

If all else fails, Fuld left open the option of selling the company.

"We remain committed to examining all strategic alternatives to maximize shareholder value," Fuld said on a conference call.

Further, the firm is also taking a big bet that a spin off of its commercial real estate assets will get a strong market reception in early 2009. The new entity will be called Real Estate Investments Global, and will be run by independent management.

Williams said he believes Fuld now has a limited amount of time, perhaps until Monday, to unveil a bona fide deal or run the risk of shares tumbling even further. And, he said, that could lead to a worst-case scenario where rumors about the company cause anxious trading partners to pull business — a scenario that felled Bear Stearns six months ago.

Wall Street remains skittish about financial stocks since a run on Bear Stearns caused the U.S. government to orchestrate its sale to JPMorgan Chase & Co. in March. Lehman, the biggest U.S. underwriter of mortgage-backed securities, was automatically scrutinized.

Global banks have lost more than $300 billion from write-downs since the housing slump evolved into a full-blown credit crunch.

Unlike Bear Stearns, Lehman Brothers has access to funds from the Federal Reserve through the central bank's discount window. The government has allowed investment banks to borrow money to cover short-term needs, an ability that only commercial banks had in the past. The borrowing could buy Lehman some time while it works out its restructuring.

Fuld also is one of the most respected and popular bankers on Wall Street. He led his firm back from major capital shortages during the financial crisis in 1998. Analysts said he inspires confidence that he can reinvent the bank despite one of the worst economic climates since the Depression.

"Every other major Wall Street bank was trying to duplicate the Lehman model that Fuld created," said Brad Hintz, an analyst with Sanford C. Bernstein and a former Lehman chief financial officer. "He is extremely well liked and respected inside and outside the firm."

Hintz said he is confident the company has enough capital or that Fuld "would be selling his office furniture on eBay if he had to." He said his former boss has no intention of giving up the helm, and that the plan will keep Lehman in business.

"They are getting rid of the risk positions and keeping the company together because Dick Fuld knows his franchise is good," Hintz said. "They just wound back the clock by about ten years to a time when they were mainly a fixed income shop, and they were profitable back then. The management is strong, and their mission is to rebuild."