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Forcing the hand

As Lehman faces bankruptcy, Eva Poon finds the bank is between a rock and a very, very hard place.

Dick Fuld's announcement this week that Lehman Brothers was exiting the vast majority of its commercial real estate assets comes as a last-ditch effort by the bank to keep afloat. The Lehman chief executive officer finds himself stuck sorely between a rock and a very, very hard place.

The bank's prized $30 billion (€21 billion) commercial real estate portfolio counts approximately 58 percent debt positions, 26 percent equity positions and 16 percent securities, with more than half of the assets in the Americas.

But following write-downs of $7.9 billion in the third quarter alone (including $5.3 billion on residential mortgage-related positions and $1.7 billion on commercial real estate positions), Fuld has been forced to let go of a vast bulk of the bank's commercial real estate portfolio, spinning off the assets to shareholders via a separate, publicly traded company, REI Global, which will not be marked-to-market. The move will leave Lehman with a $5 billion portfolio of commercial real estate assets.

Unfortunately for Fuld, the “very, very hard place” he now finds himself in is one in which Lehman has had to offer up for sale a 55 percent stake in its highly-prized and profitable investment management division, including the private equity and private equity real estate operations, Lehman Brothers Merchant Banking and Lehman Brothers Real Estate. The division also includes venture capital, infrastructure, credit and funds of funds groups and the sought-after asset management unit, Neuberger Berman.

It's a hard place Fuld really wants to get out of, but it's a prime example of how a booming private third party funds business can be impacted by their public parent's untenable balance sheet (real estate) assets.

One thing is for sure though, private equity real estate firms armed with capital will be primed and ready for the fallout.