Officials at Lehman Brothers are hoping to finalize plans to raise capital and sell off bad debts sometime this week, though the exact nature of the effort is still in flux, people close to the company tell CNBC.
As reported Lehman Brothers , facing billions of dollars in additional losses and writedowns from bad debts on its books, has been in negotiations to sell pieces of itself to foreign banks, sovereign wealth funds, and private equity firms. Meanwhile, the company has been cobbling together a bold plan to remove tens of billions of dollars in bad debt, composed of subprime loans and commercial real-estate investments, by spinning off the soured investments currently on its books into a separate company.
The separate company has many benefits for Lehman because, under the proposed structure, the bad debt would be off the firm's balance sheet removing an uncertainty that has crushed shares of Lehman from most of the year. In addtion, under the plan Lehman shareholders and other investors could own a piece of the new company composed of the real-estate investments. So if the value of these securities and holdings eventually recover, Lehman investors would benefit.
But just moving the assets off Lehman's balance sheet isn't cost free; Lehman must raise capital, possibly as much as $10 billion or more depending on how much the real-estate assets will be marked down from their original values. Moreover, people close to the deliberations between Lehman and possible new investors say many of the foreign banks have been squeezing the firm and its two top executives, CEO Dick Fuld and President Bart McDade, on price of buying a chunk on the company.
For these reasons, Fuld and McDade may be forced to raise additional capital by doing something that they would like to avoid and spin off a chunk of the firm's asset management division, which includes the firm's crown jewel: Neuberger Berman asset management unit. As first reported by CNBC, Lehman has been shopping the investment business to private equity firms, including Kohlberg Kravis Roberts. The firm values the unit at $10 billion, but possible investors have been balking over price.
Because so much of the plan is in flux, Lehman may not publicly announce the proposal this week as initially planned, though they expect to finalize most if not all of the plan in the coming days, people close to the firm say. Some people inside Lehman had said the firm might also preannounce third-quarter results this week -- originally scheduled to be released next week-- but that is in flux as well.
The capital raising plan -- maybe the most ambitious in recent Lehman turbulent history -- comes amid growing doubts that Lehman can eventually compete with big Wall Street players without being sold to a bank with additional capital. Fuld has helped Lehman escape near-death before, including after the Long Term Capital Management debacle that caused huge losses and almost led to a run on the bank. No one expect Lehman to implode the way Bear did in March given the strength of its management and its access to the Federal Reserve discount window which now allows emergency borrowing by Wall Street firms.
But people inside Lehman say if the firm can survive the current crisis, it will change dramatically from the risk-taking bond house that turned huge profits up until this year -- and now massive losses. People with knowledge of both Fuld's and McDade's thinking say the two executives are currently envisioning Lehman taking far less trading risk in the future and that it will resemble Lazard Freres, which specializes in investment banking and other low-risk assignments.
There are already signs that Lehman is putting a new team in place to deal with this new future. As first reported by CNBC, Fuld is handing more of the day-to-day responsibility to his No. 2, McDade, and people inside the firm expect him to step down as CEO, handing that job to McDade, and remain as chairman in the coming months.
Earlier Sunday, Lehman announced changes to its executive management. Jeremy Isaacs, its long-time CEO of its international operations will "retire" by the end of the year, and Andrew Morton, its global head of fixed income will leave to "pursue other interests."
And with regards to the U.S. taking over Fannie Mae and Freddie Mac , Wall Street executives and Lehman investors are predicting that the bailout plan will spark a rally in brokerage stocks and tighten credit spreads.
If spreads tighten enough, Lehman will have to raise less capital after it spins out or sells its bad debt and that might also preclude a sale of Neuberger Berman to raise capital. In short, the bailout of Fannie and Freddie may also help bail out Lehman.