Like commercial real estate? Lehman has a deal for you

From Times staff writer Walter Hamilton:

A big part of Lehman Bros. Holdings Inc.’s plan to save itself is to spin off to shareholders the bulk of the investment bank’s commercial real estate portfolio.

Would that be a gift -- or a bomb?

The commercial real estate market hasn’t suffered on par with the worst of the residential real estate market’s decline, but there are growing signs of weakness on the commercial side.

Lehman has been a huge player in financing commercial projects. Now it proposes to move up to $30 billion of its $32.6-billion portfolio of commercial mortgages and other real estate holdings into a new entity to be called Real Estate Investments Global -- REI Global, for short. That entity then would be spun off to Lehman shareholders and would trade publicly.

The spinoff would include the company's mortgage investments tied to California land developer SunCal Cos.

In effect, Lehman is taking a page from one crisis to try to overcome another: The firm is proposing a restructuring technique known as "good bank/bad bank," which was used by other battered institutions with real estate problems during the savings-and-loan crisis of the late 1980s and early 1990s.

The idea is to segregate worrisome assets into a subsidiary (the "bad" bank) and then legally separate it from the main company (the "good" bank).

In Lehman’s case, the goal is to revive investor confidence in the firm by shearing off assets that could fall further in value.

"You’re basically bringing some closure to a mess," said veteran bank analyst Bert Ely. "You’ve gotten [faltering assets] off your books. You’re no longer on the hook and you’ve capped your downside."

Lehman could have tried to sell its commercial assets at a loss in the market -- as rival Merrill Lynch & Co. is doing with certain real estate securities. But Lehman has bent over backward to avoid a fire sale that would result in further balance-sheet write-downs.

From shareholders’ perspective, the question is whether they would be getting something of real value in REI Global, or an investment that could collapse as soon as it begins trading.

Lehman sought to paint its commercial assets as fairly valued now, after the write-offs the firm already has taken. "We do not envision large write-downs in the commercial mortgage portfolio given the present market," Lehman CEO Richard Fuld told analysts on a conference call Wednesday.

"REI Global will own a high quality portfolio of assets, which is diversified by geography, property and lien type," Lehman said. "REI Global's primary focus will be to maximize shareholder returns by selling assets or holding them to maturity, whichever provides the greatest return."

The catch is that the good bank has to pour in capital to finance the bad bank. Lehman signaled that it would inject at least $5 billion in capital into REI Global.

The spinoff "has to have enough equity capital that it can stand alone," Ely said.

Yet Lehman’s core problem has been that it needs fresh capital for itself, and has been unable to find a deep-pocketed investor to step up. The breakdown of talks with a South Korean state bank triggered the 45% plunge in the brokerage’s shares on Tuesday -- and forced the firm to move up its restructuring announcement from next week.

The market's verdict on the restructuring plan on Wednesday wasn't encouraging: Lehman's shares stabilized for much of the session but finished down 54 cents to $7.25 -- a new 10-year low.

Photo: Lehman Bros. headquarters in New York. Mario Tama / Getty Images

Comments

[martscan]

With the Koreans backing off of a deal with Lehman, apparently due to Fuld's reluctance to cut his price, and despite their access to the Fed discount window..Lehman now faces the stigma of a leper on the Street..and if no one does business with them, I can't see them surviving..at least not in their present form. Also, I don't think Ben and Hank are willing to risk the criticism of another backstop move. Lehman Bros. is in the death throes.

[Get Real]

So, Lehman is trying to move the hot potato loans to a new company, and give shareholders that new company? The new company should be named, "Tick, tick, tick", because that hot potato is debt bomb getting ready to detonate.

Under what corporate law can a company simply shovel its shareholders and bad debt out the door to sink together, leaving the overpaid CEO and his buddies enjoying their existing jobs and the existing good assets of the company?

This attempt should be a clear sign to investors everywhere that Wall Street, and Corporate law, is a totally rigged game designed to fleece money from mainstreet America and put it in the pockets of a few fat rich guys.....the same guys who buy legislation in Washington (remember GW trying to get all the Social Security funds transferred to Wall Street banks a couple of years ago?)

GWs administration let Fannie Mae sell, in November, 11 BILLION DOLLARS of (now worthless) stock to every Pension fund in the country (that is..the funds that pay for the retirement of average Americans). Now, GWs administration has taken over Fannie Mae, and stated that it will not honor that stock until it has paid off Chinese and Japanese bond funds. GW has essentially, now, taken 11 Billion dollars from average Americans and GIVEN IT DIRECTLY to Chinese and Japanese investors.
To repeat, the Chinese and Japanese bond funds will receive 100% of their investment PLUS INTEREST, while the US Pension funds have taken, so far, a 99% loss on THEIR investment. (Shares were 57$ in November, are 70Cents today).
With a Federal Government like that, who needs terrorists?

[martscan]

Get Real:

I think you may be confused between the difference of debt holders vs stockholders.

[Get A Clue]

Get Real

You have no idea what you are talking about. First, with regard to the good bank/bad bank split, please tell us what the problem is with that, from a shareholder's perspective. Pre split, the shareholders owned the combined entity that had good and bad assets, and the taint of the bad drove down the value of the combined entity. Post split, the shareholders own exactly the same stuff, except now they have the ability, if they so choose, to sell the bad assets separately.

Second, re FNMA, again, tell us what exactly is wrong with this? It is a basic tenet of corporate law, and finance, that creditors are entitled to be repaid in full before shareholders get anything. Shareholders are entitled only to residual value,and if the residual is zero, well that's the risk they took in exchange for the upside. The debt holders aren't getting paid because they are chinese & japanese (and don't be naive, plenty of US entities, including hedge funds and pension funds, hold GSE debt like this), they are getting paid because that's exactly what everyone, including the shareholders, agreed to.

Third, GW never tried to transfer Social Security funds to Wall street banks.

Last, please go back and learn some facts before you waste our time with your ignorant nonsense.

[Dave Greenberg]

So we should now help another thief Wall Street Company with bail out money for making bad decisions? They were the ones who started this whole mess buy underwriting worthless loans now they all cry fowl. The President is blamed for everything, is that correct? Get your head out of your ass and stop thinking like a communist or socialist that want the government to take care of everything.

Let them fall and blame the CEO's who need to forfeit all of their salaries or go to jail. I am sick of all you people playing election year politics and blame one party or the other.

[Steve K.]

Can anybody cite a few major examples of "good bank/bad bank" scenarios that played out during the savings and loan crisis?