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At Lehman, time for action is now

The firm promises to re-engineer itself, but doubts will linger until CEO Richard Fuld produces a real deal.

By Colin Barr, senior writer
Last Updated: September 10, 2008: 4:33 PM EDT

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NEW YORK (Fortune) -- Lehman Brothers continues to talk a good game, but the time for action is running short.

CEO Richard Fuld outlined an ambitious plan Wednesday to sell part of the company's lucrative investment-management unit, spin off commercial real estate holdings and sell U.K. residential mortgages.

But Lehman (LEH, Fortune 500) also said it lost nearly $4 billion in its third quarter ended last month, reflecting continued deterioration in the mortgage markets.

That wider-than-expected loss increases pressure on Lehman to rebuild its crumbling capital base at a time when investors are showing little interest in purchasing mortgage-related assets at anything above fire-sale prices.

What's more, even a day after Lehman shares plunged 45% as talks with potential investor Korea Development Bank collapsed, there are signs that Fuld has yet to recognize the urgency to move now, before any more declines in the company's share price further reduce its ability to dictate terms of any transaction.

Fuld insisted on Wednesday's conference call with analysts and investors that Lehman is in the final stages of auctioning off a 55% stake in the Neuberger Berman investment management business.

Lehman said in a press release Wednesday that it "is in advanced discussions with a number of potential partners" for Neuberger, "and expects to announce the details of the transaction in due course."

But Lehman's idea of due course and the market's may differ, judging by the recent free fall of the company's stock and the timing of the plans - sketchy as they are - that Lehman is offering.

The recent activity in Lehman shares - up fractionally in extremely heavy trading Wednesday, leaving them down 52% for the week - suggests that plenty of investors fear the investment bank is on the verge of collapse. The cost of insuring the company's debt against default, measured in the market for so-called credit default swaps, has soared this week.

And yet, Reuters reported Wednesday that Lehman doesn't plan to announce a sale of a stake in the investment-management business until next month. Bids for the auction are due Friday, Reuters reported, citing a person familiar with the matter.

In the wake of last weekend's move to essentially nationalize Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) - an event that, if long expected, nonetheless surprised investors who doubted the mortgage companies were in imminent danger - it's remarkable that Lehman is so confident that it will be around come October.

Lehman v. Merrill

Lehman's "promises, promises" approach offers a stark contrast to the path being taken by another struggling brokerage firm, New York rival Merrill Lynch (MER, Fortune 500).

In July, Merrill posted its latest hefty quarterly loss while announcing agreements to sell assets. Just a week later, the company announced a further round of capital-raising, spurred in part by an agreement to sell a portfolio of troubled debt once worth $30.6 billion at just 22 cents on the dollar.

Merrill chief John Thain has been rightly criticized for repeatedly claiming the firm was in a solid capital position and then reversing himself soon after. Fuld has faced the same criticism.

But Thain has quickly struck deals to sell assets at terms investors can assess on their own. In addition to the cut-rate CDO sale, the company sold its stake in financial data provider Bloomberg and a back-office operation.

Lehman, by contrast, keeps saying it intends on "de-risking" its balance sheet by cutting mortgage exposures, creating a much stronger, if smaller, firm that will emerge next year.

Fuld has even branded the recent decline of the company's shares a "distraction," as if the low market value being accorded Lehman somehow doesn't carry an important message of its own.

The risk is that with Lehman shares trading at lows last seen after the 1998 collapse of Long Term Capital Management, it's all too plausible that next year will never come.  To top of page

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