Lehman Brothers may split to tide over current crisis

05 September 2008

Lehman Brothers has been experiencing a lot of new developments in recent times.

After record losses drove its market capitalisation to a low of just over $10 billion and cost the jobs of the top management, the respected Wall Street institution received an offer for a fourth of the bank from Korean Development Bank.

Most surprisingly, the offer was worth $6 billion or almost a 100 per cent premium over prevailing prices. (See: Financial crisis claims jobs of Lehman CFO and COO and Korea Development Bank eyeing Lehman Bros)

That is just one of the options Lehman has in order to raise capital. Lehman is also considering selling its prized investment management arm, which includes Neuberger Berman, for about $7 billion, possibly to a private equity group like Apollo or Kohlberg Kravis Roberts.

Now, the bank is reportedly working toward a radical solution in its fight for survival - splitting itself into a ''good'' bank and a ''bad'' one. Lehman, which has been searching for a financial lifeline from outside investors, is contemplating placing about $30 billion of troublesome commercial mortgages and real estate that it owns into a new publicly traded company - the ''bad'' bank, nicknamed Spinco. The rest of Lehman - the ''good'' one - would then be able to carry on with the help of a cash infusion from one or more investors. (See: Lehman Brothers may go for $4 billion write-down in Q3, feel JPMorgan analysts)

The move is one of several under consideration as Lehman prepares to report what could be grim third-quarter results this month. But the good bank/bad bank idea is hardly new. Several troubled financial institutions took similar steps in the late 1980s and early 1990s.