Lehman remains 'too big to fail'

By Robert Plummer
Business reporter, BBC News

It's the fourth-largest investment bank in the US and a self-proclaimed "innovator in global finance" - but of late, journalists have been routinely describing it as "Wall Street's most troubled firm".

Lehman has suffered heavy losses from the credit crunch

For Lehman Brothers, the gulf between its illustrious past and its present poor performance could hardly be greater.

The sub-prime mortgage market crisis that began unfolding more than a year ago has taken its toll on the bank's share price, which has steadily fallen from $82 in the summer of 2007 to below $8 today.

In short, the credit crunch has plunged Lehman into one of the worst crises in its 158-year history, prompting write-downs and losses worth more than $7bn.

Lehman was heavily dependent on the mortgage market and was once the biggest US underwriter of mortgage-backed securities.

Now fears are growing that the bank will be unable to raise sufficient capital to ride out the storm, following the news that South Korea's state-run Korea Development Bank has walked away from negotiations to buy a stake in it.

Senior Lehman executives must be anxiously hoping that the bank can avoid the fate of the biggest sub-prime casualty so far, Bear Stearns, which was taken over by JP Morgan earlier this year.

In terms of size, Lehman trails behind its big three rivals in the US securities market - Goldman Sachs, Morgan Stanley and Merrill Lynch. But financial experts still see it as too big to be allowed to go under.

"The US government cannot let Lehman fail, because the systemic ripples would be too big," says banking analyst James Hyde at European Credit Management in London.

'Gorilla'

Lehman has responded to the turmoil by shaking up its top management three times in the past four months.

However, chairman and chief executive Richard Fuld remains firmly at the helm, as he has been since the firm was spun off from American Express in 1994.

Mr Fuld, who has never worked for any other company, joined Lehman in 1969 as a trader and quickly became known as "the gorilla".

Explanations for his nickname vary, with some attributing it to his hobby of weight-lifting, while others speak of a tough-guy attitude and a bad temper that has apparently mellowed over the years.

Chief executive Richard Fuld has spoken of "challenging times"

Apart from that, little else is known of him. Employees speak of a man consumed by his work, prone to communicate in monosyllables, with few outside interests.

Whatever the future holds for Mr Fuld, Lehman itself has successfully pulled back from the brink more than once since it was founded in 1850 by three Jewish immigrants from Germany.

Its first brush with disaster came during the stock market collapse of 1929. It also racked up heavy losses amid the stagflation and oil shocks of 1973, then hit trouble again in 1984 when it was taken over by American Express.

It was Mr Fuld who emerged as the winner when Lehman regained its independence 10 years later.

He also steered the firm boldly through the aftermath of the 11 September 2001 attacks on the US, when Lehman had to flee the rubble of the World Trade Center and disperse its operations across New York.

Mr Fuld remains one of Lehman's biggest individual investors, owning about 3.4 million shares.

'Unacceptable'

In June, Lehman Brothers reported a $2.8bn loss, its first negative quarterly result since its demerger from American Express.

At the time, Mr Fuld called it an "unacceptable performance" and said steps were being taken to ensure it would not be repeated.

Now it has been followed by an even bigger quarterly loss of $3.9bn.

To have any hope of reassuring markets, Mr Fuld needed to announce some decisive action to offset these grim tidings.

And as analysts had speculated, this consists of a plan to sell a majority stake in its investment management unit, which includes fund manager Neuberger Berman, as well as a move to spin off its commercial real estate assets.

Earlier reports had said Lehman was in talks with private equity firms about selling part or all of the investment management business, which could raise several billion dollars.

Those staff who remain with Lehman have reason to fear for their jobs. The firm, which employs about 26,000 people, has already made more than 6,000 people redundant in the past 12 months.