Lehman Weighs Good Bank/Bad Bank Scenario
Lehman Brothers, one of the largest underwriters of mortgage-backed securities, reportedly is considering the creation of a “bad bank” model as it attempts to rid itself of some $30 billion in troubled mortgages and real estate holdings.
Fallout from the subprime crisis and ongoing credit crisis has taken a toll on Lehman Brothers. The company’s shares are down 77% this year, falling nearly 10% on Sept. 4 to $15.17. In addition, Lehman has been plagued by $8.2 billion of credit losses and write-downs in 2008, with analysts predicting the company’s upcoming earnings report could include another $4 billion of write-downs.
The New York-based firm also is expected to announce additional job cuts of up to 1,500 in mid-September, bringing the total number to 6,400 since June 2007.
Lehman’s ongoing streak of bad luck has caused Richard Fuld, chief executive officer, to weigh several options to rid the bank of hard-to-sell assets and raise much-needed capital. Splitting off Lehman’s undesirable assets is just one of the plans under consideration. In theory, the move would allow the bank to put $30 billion of essentially toxic, hard-to-value commercial real estate assets into a new publicly traded company.
Meanwhile, the “good” bank portion of Lehman would then put the troubled firm on more stable ground as it tries to regain the dwindling confidence of investors, as well as other banks, hedge funds and business partners.
Creating the separate “bad bank” would require Lehman to supply up to $8 billion in equity, according to a Sept. 5 article in The New York Times.
The bad bank/good bank model is not new. Several troubled financial institutions have used the strategy over the years, including Mellon Bank when it created Grant Street National Bank in 1988 to handle risky real estate loans. As part of the deal, Mellon shareholders were each given one share in the new company.
Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
