Lehman forced to offload risky assets at a loss
But shedding the assets may create another headache for the firm — the need to raise large amounts of new capital, including common equity.
Any capital raise would be painful for Lehman and its shareholders, given that the company just raised $6 billion in June and trades at a significant discount to its book value, or the net accounting value of its assets.
But Lehman, the fourth-largest US investment bank, may have little choice as it wrestles with roughly $65bn in mortgage-related assets, particularly after Merrill Lynch agreed to shed $30.6bn in toxic assets at a fire-sale price of 22 cents in the dollar, analysts said.
“Lehman’s caught between a rock and a hard place. They’re getting more and more pressure from regulators and investors to add reserves or mark these things down”, said David Hendler, an analyst at independent research firm CreditSights in New York.
“In normal times, they could wait it out, but the market wants it done now,” Hendler added.
The New York Post has reported that Lehman was talking to potential buyers about selling $30b in assets. CNBC television said Lehman was in talks with BlackRock Inc to sell mortgage securities and other assets. Both Lehman and BlackRock declined to comment.
Lehman’s chief financial officer told Merrill analyst Guy Moszkowski recently that the investment bank was willing to sell assets at a loss if the deal materially reduced risk, the analyst said in a report.
Lehman had roughly $65bn in mortgage and real estate-related assets on its balance sheet as of May 31.
Selling at a loss seems increasingly likely after the Merrill deal last week.
Lehman’s assets may be of much higher quality, but Merrill’s low sale price for mortgage-linked securities implies that many banks’ assets connected to mortgages may be marked down further.
Lehman wouldn’t have to sell assets at much of a loss before it had to raise capital.
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