Lehman to Cut 5% of Staff, Starting Next Week: Source

Lehman Brothers will begin long-anticipated layoffs early next week, CNBC has learned, on the way to roughly a 5 percent cut to its 28,000-strong workforce.

Lehman Brothers
Bert van Dijk
Lehman Brothers

The layoffs of about 1,400 workers—which come in addition to a previously announced 5 percent cut—are part of an initiative by Lehman Chief Executive Officer Dick Fuld to remake the firm into a smaller, more nimble, and less leveraged outfit, following the implosion of Bear Stearns.

One source has told CNBC the latest round of cuts will begin Monday.

Bear Stearns' leverage—particularly its massive borrowing of money from hedge funds to finance operations through so-called "repo trades"—has been cited as a primary cause of its implosion in March.

As rumors spread alleging that Bear Stearns had liquidity problems, those same hedge funds stopped lending money to the firm and, moreover, began shorting its stock until current Bear Stearns CEO Alan Schwartz went to the Federal Reserve and JPMorgan Chase for emergency funding.

JPMorgan offered to buy Bear for $2 a share. Though the final price tag eventually rose to $10, the bargain-basement sale sent shudders through Wall Street—and Lehman in particular—as the firm became the target of many of the same hedge funds that had shorted Bear Stearns.

Fuld, one of the toughest CEOs on Wall Street, went on the attack: First, he alleged to the Securities and Exchange Commission that he had evidence that hedge funds colluded to short Lehman into oblivion the moment the Bear Stearns deal was complete.

He then went to work on Lehman's balance sheet, putting in place the layoffs that will begin next week. He also embarked on a massive deleveraging of Lehman.

At the time of the Bear implosion, Lehman was leveraged 20-to-1—meaning 20 borrowed dollars for every dollar in capital available to the firm. Bear Stearns, by contrast, was leveraged about 40-to-1. According to people close to the company, Lehman is now leveraged between 12-to-1 and 14-to-1.

A Lehman spokeswoman declined to comment.

Borrowing is essential for any Wall Street firm to survive. Investment banks typically receive financing by engaging in repo trades: They borrow money from hedge funds and other firms, providing securities such as bonds and other fixed-income investments as collateral.

One of the reasons Bear Stearns collapsed is that hedge funds stopping accepting the firm's collateral, leaving the firm unable to borrow and, by extension, stay in business. Because Bear Stearns was so reliant on this borrowing, it was only a matter of time before it could no longer compete with other firms.

Fuld, it seems apparent, wants to prevent the same thing from happening to Lehman.