Struggling US investment bank, Lehman Brothers may have lost $US3.9 billion ($US4.87 billion) in the third quarter, but the market remains unconvinced that it is out of the woods. No, it’s still stuck in the thickets, unable to announce a big new shareholder with a fresh capital injection.
The share price fell 6% overnight to $US7.25 after Tuesday’s stomach crushing 45% dive. The result was delivered 10 days earlier than initially scheduled.
Not helping confidence was the cut to the dividend from 68 US cents a share to just five cents. While that will save Lehman $US450 million a year, it’s a token gesture. Its problems are a multiple of that saving and the market took it as such.
In fact there’s now a feeling that there are no big pots of cash out there ready to help recapitalise struggling banks and financial groups. The Korean Development Bank pay the price Lehman wanted for a 25% stake and was warned off by regulators. Several other groups rumoured to be interested, such as Nomura of Japan, KKR and Carlye Group haven’t raised their hands with a cheque book attached.
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For that reason the next crisis could happen at Washington Mutual whose shares plunged 30% yesterday to a 17 year low of $US2.32. The shares have lost 44% in the past two days as US brokers claim potential buyers might not be interested in doing a deal because of a new accounting rule that means any buyer has to pay market prices for the assets, plus growing fears that WaMul needs more capital.
Lehman failed to find buyers to give it a cash injection and analysts doubt that Washington Mutual would be any more successful in finding a buyer at the moment after TPG injected capital in a $US7.2 billion funding raising last May and took a shareholding.
Investors would look to that group to provide new capital, if it was needed, but the groups that invested in May are all staring at multi-billion dollar losses as the shares have fallen dramatically since then, including the 44% loss in the past two days.
The market’s questioning of Lehman and Washington Mutual could also apply to other struggling US banks like Citigroup and Merrill Lynch who have lost close to $US100 billion between them in the past year. Any more losses by either might find them with difficulties similar to Lehman Bros.
Lehman’s loss was its biggest ever after the $US2.8 billion second quarter loss. Total write-downs for the third quarter were put at $US7.8 billion and over $US15 billion in total in the past six months.
The bank is selling a 55% stake in its funds management business, with bids due by close of business in the US early Saturday morning, our time: the success of that sale could very well determine its future because it’s the first of three big moves to try and resolve the problems. It’s also spinning off around $US30 billion in real estate assets and loans in the US into a new company to be owned by its shareholders, and selling $US4 billion of British real estate loans to fund management group, Blackrock.
But the market doesn’t see this as enough to survive: either Lehman will fail because of more losses, or it will succeed in raising money and slimming down and will be taken over by another group.
Tomorrow night’s sale of 55% of the asset management business is the next big test, as is the attitude of credit rating agencies who have Lehman on credit watch negative or an equivalent negative outlook.