Foreign Investors' Exit Causes Lehman Woes

On 'Planet Money'

A primer from NPR's new global economy team:

Questions have been raised about whether it is wise to let foreign governments buy up stakes in U.S. financial institutions. Now, with Lehman Brothers, the U.S. is getting to see what happens when a foreign investor walks away.

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ROBERT SIEGEL, host:

Perhaps the strangest part of the Lehman Brothers saga is what did not happen. Where are the other foreign governments sweeping in to pick up a U.S. bank on the cheap?

Not that long ago, the governments of Abu Dhabi and Kuwait bought large shares of Citibank. Singapore's government bought a large part of Merrill Lynch. In fact, some politicians have warned of foreign governments buying up the entire U.S. infrastructure piece by piece.

NPR's global business correspondent, Adam Davidson, keeps an eye and an ear on these things, and he joins us now from New York. Hello, Adam.

ADAM DAVIDSON: Hi, Robert.

SIEGEL: So are there foreign countries knocking on the door, waiting to buy up Lehman Brothers?

DAVIDSON: Not that we've seen. It's really stunning. I mean, who knows what's happening in secret. But you know, Abu Dhabi, Kuwait, Singapore, China - a year ago, eight months ago, they were gobbling up all of these troubled U.S. banks or as much of them as they could, and I was just looking at some statistics.

In the last three months of 2007, these foreign, we call them sovereign wealth funds, these investment funds of foreign governments, spent something like $50 billion just in three months.

In all of this year, they spent far less than that - I mean, less than $10 billion, which for these guys is pocket change.

SIEGEL: Well, what's changed? What's the big - are they just tapped out, or what's the problem here?

DAVIDSON: Oh, they are not tapped out. Abu Dhabi has something like $800 billion to play around with. Singapore has many hundreds of billions. China, you know, has over $1 trillion of U.S. debt that they own and a very large and growing sovereign wealth fund. They have plenty of money.

Here's the thing. They realize that the U.S. government won't let them get a controlling share. In fact, the U.S. government won't let them get more than five or 10 percent ownership of these banks, and that comes with very strict rules.

It's very hard for them to get anyone on the board to really play a decisive role in running these banks. And a year ago, it seems, they were okay with that. They were willing to take a very limited role, even though they were spending a fortune. But now they're saying, wait a second. These banks are pretty badly run. If we're going to put our money there, we are not going to do it unless we have real power, unless we can run the show.

SIEGEL: Well, should the U.S. government then make it easier for foreign governments to control U.S. banks? Obviously, we can understand there'd be some political opposition to that idea.

DAVIDSON: Yeah, there's an awful lot of political opposition. And we're getting into some of the most hotly contested issues in the global economy right now.

There's no question, there is a desperate financial need for capital. We know that. U.S. banks don't have enough money to run themselves. That should be clear. I mean, I'm talking cumulatively. I'm not saying every single bank. I don't want to start a bank run.

But cumulatively, there are many banks with serious, serious trouble. And where are they going to get that money if they're not going to - these sovereign wealth funds are the single - these are the single largest investors in the world. If you're going to cut them off, then you have to find capital somewhere else, and lately, that's more and more been the U.S. government.

So financially, there's a clear answer - yes, we should let them invest. Politically, it's a much trickier point.

SIEGEL: Well, if it amounts to an issue of national security - that is, do we want the financial structure of the country to be owned by foreign governments - then how do you go about addressing this problem? Do you address the financial crisis and say, well, let's make it easier for foreign governments to control banks? Or do you say, well, let's just tough it out here and see what happens to our economy because we just can't do that?

DAVIDSON: You know, Robert, I lived in the Middle East for many years, and I covered the banking sector and economics there, and you know, there is a strong argument that it is good for our national security.

The more global banks, the more Gulf State banks and Chinese banks are interconnected into the U.S. banking system, well, the closer we're going to be and the better our relations are.

Of course, there are people who just don't buy that argument. And this is going to be - I predict this will be a growing issue in the next year.

SIEGEL: Yesterday on the program you told us that many foreign governments see the U.S. as a bit weaker because of the subprime crisis. Is the absence of eager foreign buyers, at least so far as we know for Lehman Brothers, is that more evidence of that phenomenon?

DAVIDSON: I think, definitely. I think the U.S. had a luxury for most of the 20th century and right on into the 21st century. We were able to really define the terms of our role in the global economy, and right now, at this moment, we can't anymore.

SIEGEL: Okay, thank you, Adam.

DAVIDSON: Thank you.

SIEGEL: That's NPR's global business correspondent, Adam Davidson. And news, we also have a new blog. You can find more analysis of Lehman Brothers and the United States' changing place in the global economy at our Web site. Go to npr.org/planetmoney.

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Lehman Announces Asset Sale Amid Jitters

On 'Planet Money'

A primer from NPR's new global economy team:

Awash in Wall Street rumors that it could collapse, the investment bank Lehman Brothers is quickly trying to sell off assets to raise billions of dollars, enabling it to stay alive as an independent bank.

Wednesday morning, Lehman Brothers announced it expects to lose $4 billion in the current quarter. That followed Tuesday's news that Lehman stock had lost nearly half its value.

Lehman has many assets to sell, but it is not clear the firm has buyers yet — or how much they might pay.

Rumors about financial troubles at Lehman had dominated the financial markets for days. Wednesday, the company did what it could to get control of the situation.

It released its third-quarter earnings report early and it told investors how it hoped to climb out of the hole.

The plan is to sell a majority stake in its investment management division, but company officials also hinted that they would consider other ideas too — including an outright sale of the company.

Lehman also said it is talking to some big private equity firms about investing in the company. But some analysts are skeptical that anyone will want to put money in Lehman.

Joseph Mason, a professor of banking at Louisiana State University, notes that Lehman was in talks for months with the Korea Development Bank about a deal.

"KDB had plenty of time to do due diligence and backed out completely," Mason says. "Now Lehman is trying to say, "Well, these other private equity investors might get involved.' You have to ask the question: 'Are [other investors] going to see anything different than KDB?"

It's not just that Lehman is losing money. Lehman is a large and complex company with a number of business lines, including investment banking, bond sales and trading. Like Bear Stearns (the investment bank bailed out this past spring by a fire sale to JPMorgan Chase) Lehman is loaded down with complex securities that are especially hard to value.

Doug Roberts, of channelcapitalresearch.com, says investors don't want to touch a company when they're not exactly sure what it is worth.

The question is this, Roberts says: "Am I better off making a capital infusion now, or waiting for this thing to be liquidated or sold off where I'm going to get a better price?"

Lehman has made its problems worse, Roberts says, by being slow to acknowledge its troubles and then downplaying their seriousness. He says the company has lost confidence on Wall Street as a result.

"It's one thing if you have problems," Roberts says. "It's another thing if people don't believe what you're saying and they just came repeatedly to the point where people don't believe what they're saying."

If there's a bright spot for Lehman, Roberts says, it's the Federal Reserve's decision last March to let investment banks borrow from its discount lending window. That move ensures that Lehman will have access to capital and won't fail anytime soon.

"Lehman has a period of time to really deal," Roberts says. "It's not like something that's exploding. That also gives them a certain amount of credibility that gives them a certain amount of time to operate and try to find bidders for something like this."

But Lehman can only get by for so long borrowing money to keep going. Sooner or later it will have to carry out the kind of restructuring it announced Wednesday — or at least persuade investors it can do so.

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