Lehman Playing "Good Bank, Bad Bank"

Lehman Brothers (LEH) is considering shifting approximately $32 billion of commercial mortgages and real estate to a new company, nicknamed Spinco, using a good-bank, bad-bank model of the 1980s (see a recent SeekingAlpha article on the good bank, bad bank debate). Lehman would fund the bank with $8 billion of equity coming from Lehman (Korea Development Bank is in discussions to purchase 25 percent of Lehman for $6 billion), with the remaining $24 billion borrowed from Lehman or outside investors (see Bloomberg article). The Spinco option would allow Lehman to off-load 80 percent of its commercial mortgages, establishing a company capitalized and managed by outside investors. One benefit of spinning off the mortgages to its own shareholders is that Lehman can allow existing shareholders to benefit from any recovery in asset prices, thereby eliminating the need to sell at fire sale prices. If the plan fails, Lehman may be forced to seek out private equity funds and sell parts of the company, such as their asset management business Neuberger Berman (see previous post here and here).

While Lehman brothers certainly seems to be getting hit from every direction (see comments on Opsraie's problems here, of which Lehman has a 25 percent stake), they are certainly trying to be creative in how they pull the company out of potential failure. While taking the Merrill Lynch route of selling assets for 22 cents on the dollar (and financing much of the sale themselves) may have not even been a possibility for Lehman, current actions do indicate the they seem to think the worst is behind them, at least as far as the credit crisis is concerned. Maybe they have no other alternatives. Liquidity and confidence issues remain, but if they can get the needed capital, and keep from selling the entire company and its assets on the cheap, Lehman may in fact come out stronger, or at least be able to survive. Of course, this really depends first on staying afloat and not becoming the next Bear Stearns. Fortunately for Lehman, so far they have appeared to have a little less panic from their nervous investors (not much), a few more options available to them, and a little more time than a weekend to get something done. But as they say, paraphrasing, "act now - while 'capital' supplies last."