We've all been there before. You've got more than $70 billion in mortgage and asset-backed securities piled high in your basement/attic/balance sheet, and no amount of shifting or shuffling will do the trick. It's time for a garage sale! That's the approach Lehman Brothers (NYSE: LEH) is taking: According to a Financial Times report, the troubled broker-dealer is in talks to sell $40 billion in mortgage and real estate assets.
If I were a shareholder, I'd be thinking, "It's about time!" Despite being one of the most serious casualties of the credit crisis, Lehman has been the most recalcitrant about taking its bitter pill (in fairness, it has done some costly capital raisings).
Is Lehman wearing beer goggles?
There appears to be a mismatch between the market's perception of the need for urgent, serious action at Lehman, and the perception of Lehman's management. This is echoed by the gap between the firm's perception of the value of the assets for sale and that of the potential buyers, which include BlackRock (NYSE: BLK) and Blackstone (NYSE: BX).
Lehman must accept the fact that it is a motivated seller and cannot afford to dictate terms in this situation. In July, Merrill Lynch (NYSE: MER) unloaded $30.6 billion in CDOs at just 22 cents on the dollar. Last November, E*Trade (Nasdaq: ETFC) sold its $3.1 billion portfolio of asset-backed securities for 27 cents on the dollar. (No wonder the potential buzzards – I mean "buyers" – of Lehman's assets smell an extreme buying opportunity).
Perhaps Lehman CEO Dick Fuld's independent streak has prevented him from making certain difficult choices to right the ship. Maybe he's looking for a recovery in the housing market to bail the firm out. If so, he is likely to be disappointed -- there are few, if any, positive signs on that front.
The time for action is yesterday!
The CEOs of Merrill Lynch and Citigroup (NYSE: C) were early casualties of the credit crisis. If Dick Fuld wants to avoid adding his name to that undistinguished list, he must demonstrate greater resolve and expediency in addressing his firm's significant problems.
As some analysts begin to lower their earnings estimates for Lehman's third quarter, which ends in less than two weeks, the firm's margin for maneuver appears to be rapidly narrowing. If Lehman is unable to complete the sale of these assets and the third quarter provides some negative surprises, the board of directors needs to take a more active role.
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