Lehman to sell stake in key investment division

If Lehman moves into the future without its investment management business, issues regarding its future and sustainability as a pure-play investment bank arise,” said Cubillas Ding, a senior analyst with Boston-based financial research and consulting firm Celent. “Finding stable funding sources, especially when the markets are not looking to recover in the short-term, is an issue that senior management needs to provide a compelling solution for.”

Ding, and other analysts, also points out that Lehman still has exposure to a high concentration of risk to real estate and related investments. Lehman’s quarterly loss includes gross write-downs of $5.3 billion on residential mortgages and $1.7 billion on commercial real estate positions.

The results reflect a continued decline in Lehman’s portfolio — in the second quarter the company lost $2.8 billion for the period. It earned $887 million in the third quarter a year ago.

Lehman said it has reduced its residential mortgage exposure by 31 percent to $17.2 billion, and expects its sale of $4 billion of its U.K. residential mortgage portfolio to BlackRock Financial Management Inc. to be completed within the next few weeks. Lehman also reduced its commercial real estate exposure by 18 percent in the third quarter to $32.6 billion from $39.8 billion.

The results were released earnings a week earlier than expected after negotiations with Korea Development Bank about a capital infusion ended with no deal. That places more pressure on Lehman to sell its investment management business quickly.

Lehman has approached a broad range of possible investors, including banks in Korea and Japan. Private-equity firms in the U.S. have also been contacted about investing in the investment-management business.

Besides Neuberger Berman, the business also includes everything from private client services to private equity components. There is also talk that Neuberger’s management might get an opportunity to buy back all or part of the company.

Once the biggest U.S. underwriter of mortgage-backed securities, concerns about Lehman began to increase after Bear Stearns nearly collapsed in March. Bear, once the fifth-largest U.S. investment bank, avoided bankruptcy by selling itself to JPMorgan Chase & Co.

After posting a surprise $2.8 billion loss during the second quarter, Lehman was scrutinized by banks and customers about liquidity issues, even though the company has raised $14 billion of capital since last year. The company also brought on new top management to help boost risk management.

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