No respite for Lehman after loss warning

Chief executive Richard Fuld’s plan to rescue Lehman Brothers by selling off many of its operations has failed to stem a fall in market confidence, after the bank predicted record losses in the third quarter of this year.

The fallout from the bank’s estimated $3.9 billion third quarter losses saw the shares close yesterday at $4.39, falling from $7.79 the day before the announcement on Wednesday September 10. Spreads on credit default swaps related to the bank widened to 273.3 basis points in the week to Wednesday; after the announcement they rose further to 539.6bp today.

Following significant mark-to-market writedowns on commercial and residential mortgages, the bank announced a plan to reduce its balance sheet risk, including the sale of its residential mortgage portfolio, the creation of a spinoff company to manage its commercial real estate assets, and the sale of a majority stake in its investment management division.

In order to reduce its residential mortgage exposures, which fell 31% in Q3 to $17.2 billion, Lehman Brothers is negotiating to sell its residential mortgage portfolio to BlackRock Financial Management. The bank estimates that a sale could see mortgage exposures drop further to $13.2 billion.

The bank’s commercial real estate exposure fell from $39.8 billion to $32.6 billion in the quarter. To reduce this further, Lehman Brothers intends to spin off $25-30 billion of its commercial mortgage portfolio into a separate company, Real Estate Investments Global, in Q1 2009.

Lehman Brothers also announced its intention to sell its asset management, private equity and wealth management businesses - essentially the entire investment management division – in order to raise more capital.

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