Lehman Retools In Bid for Recovery

Investment Bank Loses $3.9 Billion In Third Quarter

NEW YORK, Sept. 10 -- Lehman Brothers, anxious to show it can weather a credit crisis that contributed to the firm's $3.9 billion third-quarter loss, said Wednesday that it would sell a majority stake in its investment-management division, slash its dividend and spin off about $30 billion of real estate assets.

The announcement did little to calm investors' concerns that Lehman, the smallest of the four major Wall Street investment banks, might suffer the same fate as former rival Bear Stearns, which was acquired by J.P. Morgan Chase in a deal regulators brokered in March after a bank run that shook the securities industry.

Lehman stock, which fluctuated throughout the session as investors tried to weigh the benefits of the plan against the costs of shrinking the firm, finished 6.9 percent lower, at $7.25. That was on top of Tuesday's 45 percent drop, which prompted the firm to unveil its plans a week ahead of schedule.

During a conference call with Lehman executives, analysts pressed for assurances that the $5.6 billion of write-downs that the firm disclosed for the quarter ended Aug. 31 -- primarily for declines in the value of assets tied to residential mortgages -- sufficiently reflected the severity of the troubles in the real estate market. The concern demonstrated the skepticism that remains even after last weekend's federal bailout of government-sponsored enterprises Fannie Mae and Freddie Mac, which play a vital role in supporting the mortgage and housing markets.

"There's still an element of doubt in terms of confidence of the financial players, and that's not going to go away just with the bailing out of Bear Stearns and the bailing out of the GSEs," said Michael Kastner, managing director of fixed income at Sterling Stamos Capital Management in New York. "What we're going to need to see is at least one quarter where the financial institutions don't show write-downs and do show profits and an ability to grow their business."

Increasing business will become a tougher task for Lehman as it unwinds or restructures several of the deals that helped it diversify in the past decade from its historic strength in bonds.

The firm plans to move $25 billion to $30 billion of commercial real estate assets to a new company that would be spun off to shareholders early next year. The new entity, Real Estate Investments Global, would aim to hold mortgage-related investments to maturity or exit them with orderly sales once the market improves instead of being forced into fire sales that turn paper losses into real ones.

Lehman, which developed a niche in the mortgage market as a way of competing with larger rivals in equity underwriting and other traditional brokerage businesses, said it was in advanced talks to sell $4 billion of mortgages in Britain to BlackRock Financial Management.

In a nod to the times, Lehman executives confirmed that their firm would probably put up the bulk of the financing for the BlackRock deal. Both UBS and Merrill Lynch used seller-financing arrangements this summer to cement deals with investment firms that acquired tainted mortgage assets from them. These arrangements illustrate the generous terms that buyers are able to demand and underscore the continuing difficulty of getting credit from traditional sources.

Lehman executives said they were not sure whether they would need to offer financing as part of their effort to sell 55 percent of the investment-management division. Bids for the business, which includes prized fund manager Neuberger Berman, are being examined.

Taken together, the restructuring measures, which include cutting the yearly dividend to 5 cents a share from 68 cents for an annual savings of $450 million, will give Lehman about half the extra capital that CreditSights debt analyst David Hendler thinks it will need to survive.

"We continue to think that for the company to return to more normalized capital markets trading capacity that it needs a major strategic stake from an outside investor," Hendler wrote in a note to clients.