How could Lehman Restructure

It is one thing to propose a restructuring, another to pull it off. That explains why investors reacted cautiously to Lehman Brothers Holdings' planned revamp, designed to clear problem loans from the Wall Street firm's books while avoiding the need to hit up shareholders for more capital. The problem? The firm hasn't actually done anything yet. That is why investors are right to be on guard. Until any deal is signed, it is far from certain. And even then, Lehman's future is still cloudy. Consider that until Tuesday, markets expected Lehman to soon reveal a strategic investment. Those hopes were shattered when Korea Development Bank said it had walked away from a possible deal, precipitating Tuesday's 45% plunge in Lehman's share price on the New York Stock Exchange. This, in turn, prompted Lehman's early announcement Wednesday of its restructuring plan and third-quarter results. Even so, Chief Executive Richard Fuld projected confidence on the firm's investor call that the deals associated with the plan will go through and that this will allow for the emergence of a new "core" Lehman with a clean and healthy balance sheet. Part of Lehman Brothers' plan depends on the sale of about 55% of its investment-management business. The firm is expecting bids by Friday, so it can't yet tell investors how much it is likely to raise from the sale. Even if that goes through, though, Lehman isn't likely to get the cash immediately. The company said on Wednesday's call that it has yet to separate the businesses being sold into a discrete structure. Additionally, investors are likely to cast a jaundiced eye on Lehman Brothers' attempt to spin off $25 billion to $30 billion of commercial-real-estate holdings into a new, separate company whose assets won't be marked to market prices. While this move would damp the risk to Lehman of hits from future write-downs of these assets, it doesn't eliminate it altogether. Lehman expects to provide the financing for this new vehicle, which in extreme cases could still leave it on the hook for losses. Also, Lehman Brothers may have to mark to market on its own books the value of the financing it extends to this vehicle. That was the case, for example, with the financing Merrill Lynch extended to complete its recent sale of complex debt instruments. True, this financing for the new company won't be as volatile as the commercial-real-estate holdings themselves. But it still could result in losses. The same risk holds true for the financing Lehman Brothers expects to provide for the sale of about $4 billion in U.K. real-estate assets to BlackRock. Where does this leave Lehman's capital? Assume the firm puts about $7 billion of equity into the new spinoff and that it generates about $4 billion in new capital from the sale of part of its investment-management business. That could translate into a reduction of about $3 billion in equity. To counter this, the firm may need to sell further assets, not an easy task in today's markets, if it is to avoid issuing new stock. But Lehman Brothers also could be forced to raise new common equity to bring its mix of common and preferred stock and subordinated debt into a balance that is more acceptable to the major credit-ratings firms. Pressure to do so could mount if there are further write-downs to the commercial-real-estate assets before they are moved to the new company as well as on the approximately $13.2 billion in residential-mortgage holdings. Lehman is still in desperate straits. Investors will need more concrete action to convince them otherwise.