Uncle Sam to the rescue of Lehman Brothers

12 September 2008

Lehman's credit crisis, which has made $3.9 billion third-quarter loss, the largest in its 160 year history, has forced the intervention of the US Federal Reserve and Treasury to lead a bail out by possibly funding the purchase of Lehman Brothers by another bank, possibly in a fashion similar to its facilitating the acquisition of Bear Sterns by JP Morgan. (See: US Fed clears JP Morgan's acquisition of Bear Stearns bank) 

The government bail-out plan is involves an agreement where public money is not involved in the rescue of Lehman by finding several buyers to acquire different divisions of the bank and hope to have a deal in place by this weekend before the Asian markets open on Monday.

The collapse of the sub prime mortgage market that has caused more than $500 billion of losses and writedowns, Lehman's market capitalisation has been beaten down to $9.5 billion and it's stock has fallen 76 per cent since the last 12 months.

In a bid to shore up its balance sheet before closing its books for the third quarter on 31 August, Lehman had been sourcing the globe for investors including sovereign wealth funds, but none of the deals have materialised over difference in valuations.

Last month Korean Development Bank, keen to take over Lehman Brothers in consortium with other Korean banks, withdrew after Korean regulators warning KDB that Lehman was a risky deal. (See: Korean regulator restrains KDB over Lehman deal) 

Lehman's boss Richard Fuld had announced plans to slash its dividend and spin off about $30 billion of real estate assets and split the remainder into two banking entities, one with good loans and the other with bad housing-backed assets.