Lehman details RE, merchant banking sale

Announcing plans to save the investment bank from collapse, Lehman Brothers will separate its balance-sheet real estate assets into a new public company, as well as sell a 55 percent stake in an investment management unit that includes Lehman Brothers Merchant Banking and Lehman Brothers Real Estate.

Lehman Brothers will spin off its $30 billion (€21.4 billion) commercial real estate operation into a separate public company in a bid to prevent the storied Wall Street investment bank from collapsing.

Reporting net losses for the third quarter of $3.9 billion, Lehman chairman and chief executive officer Richard Fuld confirmed what many had been speculating for months – that the investment bank would cut its ties to commercial real estate completely.

As part of the shake-up, Lehman said today it was also planning to sell a 55 percent stake in its investment management division, which includes private equity and private equity real estate operations. A source at the firm said the private equity operations housed major alternative investment fund management divisions including Lehman Brothers Merchant Banking, Lehman Brothers Real Estate and groups managing venture capital, infrastructure, credit and funds of funds.

Also for sale in the 55 percent stake is the highly-prized asset management unit, Neuberger Berman, and wealth management businesses.

Kohlberg Kravis Roberts and The Carlyle Group are just two private equity firms reportedly interested in buying the investment management assets from the bank. The source said the sale had moved “nicely along” and that Lehman had not ruled out separating out some of the divisions to separate buyers.

From early next year, Lehman will spin off its $25 billion to $30 billion real estate portfolio to existing shareholders with a public company called Real Estate Investments Global (REI Global). In a statement, Lehman said REI Global would not make new investments, and would “not be forced to sell assets below what REI Global believes to be their intrinsic value”.

By hiving the assets off from the rest of the investment bank, Lehman hopes to protect its balance sheet from further write-downs. Private equity and real estate investment firms have been circling the embattled bank for the past few months in an effort to take advantage of the firm’s distress.

Lehman is also expected to close a $4 billion deal with asset management giant BlackRock Financial Management in the next few weeks for part of its UK residential mortgage portfolio.

Fuld said the episode marked an “extraordinary time” for Lehman, and “one of the toughest periods in the firm’s history”.

The bank announced the restructuring plan as part of its third quarter returns, which revealed write-downs of $7.9 billion, including $5.3 billion on residential mortgage-related positions and $1.7 billion on commercial real estate positions. Overall, the bank reported a $3.9 billion net loss for the quarter. The firm said it had reduced its commercial real estate exposure by 18 percent to $32.6 billion during the quarter and would have reduced its residential mortgage exposure by 47 percent to $13.2 billion following the sale of its UK mortgage assets to BlackRock.

The news came as the Korea Development Bank finally said it would not provide Lehman with a much-needed capital lifeline, saying in a statement: “We are announcing that we ended talks at this point in time because of a disagreement over conditions of a transaction and considering domestic and foreign financial-market conditions.”

Founded in 1850, Lehman has been on the verge of collapse at least four times: in 1929 when the stock market crashed; in 1973 when the firm lost $6.7 million betting on interest rates; in 1984 following the takeover by American Express; and in 1994 when the bank faced a capital shortage.