Wall St. Journal -- Lehman to Sell Assets, Sees Loss
[u]Lehman to Sell Assets, Sees Loss[/u][i]Lehman Brothers Holdings Inc. said it plans to spin off to its shareholders the "vast majority" of [u]its[/u] commercial real-estate assets, sell about a 55% interest in its investment-management division and slash its dividend 93% as it also predicted a fiscal third-quarter loss of $3.9 billion.[/i]
[i]The moves are part of Lehman's largest effort yet to dramatically reduce its exposure to commercial real estate and residential mortgage exposure and generate additional capital.[/i]
[i]Chief Executive Richard Fuld - who fought off a severe challenge to the bank's credibility in 1998 and now has found himself trying to do so again - said its latest plans "reflect our determination to fundamentally reposition Lehman Brothers by dramatically reducing balance sheet risk, reinforcing our focus on our client-facing businesses and returning the Firm to profitability."[/i]
[i]Lehman - the smallest of the big four U.S. investment banks after the near collapse of Bear Stearns Cos. in March - said its planned spinoff, expected to close in the fiscal first quarter, will leave the firm with limited commercial real-estate exposure.[/i]
[i]Its plans to sell a majority interest in its investment-management division are expected to result in a tangible book value benefit of more than $3 billion. Lehman said it expects to maintain the majority of its pretax income from the unit, which include Neuberger Berman, Lehman's prized asset-management division that was rumored in recent months to be on the chopping block.[/i]
[i]Shares, which were up some 25% in premarket trading before the news, were recently down 3.7% at $7.50.[/i]
[i]The 158-year-old brokerage also confirmed a Wall Street Journal report that it is working with money manager BlackRock Inc. to sell a package of primarily British residential real-estate assets. Lehman said it will sell about $4 billion of its U.K. residential-mortgage portfolio, expected to be completed "within the next few weeks."[/i]
[i]As for the spinoff, Lehman said it will spin off to its shareholders $25 billion to $30 billion of its commercial real estate portfolio into a separate publicly traded company to be called Real Estate Investments Global. The spinoff is expected to strengthen Lehman's balance sheet while preserving the value of the commercial real estate portfolio for shareholders.[/i]
[i]Meanwhile, Lehman preliminary reported what would be the brokerage's second and largest loss since going public in 1994. The firm said its projected $3.9 billion, or $5.92 a share, loss will be on $7.8 billion in write-downs, offset in part by hedging and debt-valuation gains. In its fiscal second quarter, the firm posted a $2.77 billion loss on write-downs of mortgage-related assets. The losses highlight the severe consequences of Lehman's huge buildup of mortgage and leveraged-buyout debt during the credit boom.[/i]
[i]The brokerage expects to post negative net revenue of about $2.9 billion amid the write-downs and trading losses.[/i]
[i]Analysts surveyed by Thomson Reuters were recently expecting a loss of $3.35 a share on revenue of $286.3 million.[/i]
[i]The firm said its liquidity pool is estimated at $42 billion, while its [u]Tier 1 ratio[/u] is expected at 11%, up from 10.7%.[/i]
[i]Its exposure to residential mortgages will be by 47% to $13.2 billion following the BlackRock deal. Lehman also projects reporting a reduction in its exposure to real-estate investments by 18% to $39.8 billion and its high-yield acquisition finance exposure 38% to $11.5 billion. [/i]
[i]Lehman expects to report that its leverage ratio - how many times assets exceed a firm's equity - fell to 10.6 from 12.1 at the end of the second quarter. The higher the number, the more debt the firm has taken on to fund those assets.[/i]
[i]The struggling investment bank's common stock closed down 45% Tuesday and earlier in the day hit a fresh 10-year low on worries it wouldn't be able to raise needed capital. South Korean regulators dashed hopes **-owned Korea Development Bank would make an investment - thought to be around $4 billion - in Lehman, saying talks between the two parties had ended.[/i]
[i]The severe stock drop shows how skittish investors have been about Lehman, a bond-focused firm that moved aggressively into the commercial real-estate market and leveraged loans over the past few years, and often produced record profits between 2004 and 2007.[/i]
[i]Lehman expects to report its full quarterly results Sept. 18.[/i]
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[i]1. What does that "it" in paragraph one refer to? (5 points)[/i]
[i]2. Explain what is the "Tier 1 Ratio" and what it's concerned about the Lehman Brothers' risk exposures. (15 points)[/i]
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