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Has Lehman done enough?

• Robert Peston
• 10 Sep 08, 12:17 PM

is currently Wall Street's most important investment bank, but not in a way that gives it any pleasure.

Its woes yesterday socked bankers and investors between the eyes, just as they dared to hope that the US government's rescue of was a reason to be a little more cheerful.

What Lehman reminded them is that any recovery in the US residential and commercial property markets are some way off - and that the deep recession in those markets is still spilling over in poisonous ways all over the place.

That sent the US stock market into a tailspin - and once again shares are showing the classic bear-market tendency to take one stop forward followed by two steps back.

After it emerged that Lehman's attempt to raise billions of dollars in vital new capital from had run into a brick wall which may prove insurmountable, its own share price tumbled 45 percent - and it was forced to bring forward to today an announcement of what it can do next to shore itself up and the publication of its third quarter financial results.

In pre-market trading, Lehman's shares bounced up by 27 percent this morning.

So is fourth biggest investment bank in better shape than yesterday's doomsayers feared?

Well the headlines look horrible.

Its net loss for the three months to the end of August is estimated by the firm at $3.9bn - after a gross mark-to-market loss of $7.8bn on all those unfortunate investments in residential mortgages and commercial real estate.

But, for the avoidance of doubt, this firm is not bust nor seems in imminent danger of collapse.

It reduced its leverage - the ratio of its loans to equity - from 12.1 to 10.6. And it has increased its stockholders' equity from $26.3bn to $28.4bn.

Most important of all in these nervous times, its pool of liquidity is $42bn - which looks ample to meet any unexpected calls on its cash.

But that doesn't mean it is in good shape. It still has $54bn of exposure to illiquid and hard-to-monetize commercial real estate, residential mortgages and high-yield acquisition finance.

As worrying for Lehman is the massive damage inflicted on its brand by all the negative publicity generated by its struggles - which increases the challenge in retaining clients, let alone winning new ones.

So nothing less than a reconstruction of the firm is required. Today Lehman has disclosed that it is spinning off the majority of its real estate assets into a new, separate public company - which is the equivalent of cutting off a gangrenous leg.

And Lehman wants to sell a majority stake in its fund management business, to swell its tangible assets by $3bn or more while retaining a healthy slug of the income from this operation.

Will these writeoffs and proposals be sufficient to persuade Lehman's shareholders and customers that it has grasped the horrible reality of its plight and is over the worst?

Or will the slow, potentially lethal erosion of confidence in the firm continue?

Well, one senior banker there has told me that he doesn't think Lehman's decline will be arrested unless and until it can find a bigger sounder bank - such as , or - to purchase it.

But he fears that won't happen while many of Lehman's executives retain an inflated view of what their business is worth in this credit-crunched world.

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