Lehman Brothers To Shed Assets
MADELEINE BRAND, host:
From NPR News, this is Day to Day. Lehman Brothers, the nation's fourth largest investment bank, it's in big trouble. It announced a plan today to try to avoid bankruptcy. The bank says it expects to lose nearly four billion dollars in the current quarter. John Dimsdale is here now from Marketplace. And John, what is Lehman planning to do?
JOHN DIMSDALE: Well, first, it's going to sell a majority stake in its most prized asset, its investment-management division. The bank will also slash its stock dividends and sell off much of its mortgage business. You know, this announcement was triggered yesterday by the collapse of a possible deal with the Korea Development Bank that would have given Lehman some much needed capital. But Lehman's been struggling for awhile. Like Bear Stearns, it's been caught with a lot of bad mortgage debt and investors who've been frustrated that Lehman can't come up with the money to cover that debt. They've driven the bank's stock price down 80 percent this year.
BRAND: So, this is a big concern on Wall Street and a big concern in the banking industry. What about consumers, should they be concerned as well?
DIMSDALE: Well, consumers will be feeling the bank's pain, most likely in the form of higher interest rates for credit cards and car loans and mortgages. I talked to Jane D'Arista at the Financial Market Center, and she pointed out that last weekend, when the government announced that it would back up Fannie and Freddie's debts, mortgage rates dropped almost right away.
Ms. JANE D'ARISTA (Director of Programs, Financial Market Center): We had that lively little bounce there in the mortgage market where the rates went down, and everybody is very hopeful that this will restart the process of making mortgages, therefore getting rid of inventory and therefore protecting the prices of the housing market. But Lehman may take that away.
BRAND: So, John, if Lehman's problems spread to other banks, who's next?
DIMSDALE: Well, a first concern would be Washington Mutual. It's a big mortgage lender. It's under some severe stress right now. Its stock is down today. You have to look at other banks and investment houses with problem loans on their books, like Merrill Lynch, Morgan Stanley, Citibank won't be immune. You know, all these banks are interconnected now, with lots of shared debts and investments that are losing value. This crisis has pretty much changed the business model for big banks, who used to earn profits by investing in loans and mortgages that had been repackaged to essentially spread the risk to everybody.
Many of those investments have now gone south, and the banks are going to have to come up with a new system for raising the capital to lend to borrowers. The thing to watch for now is how the rating agencies, like Standard & Poor's and Fitch, put a value on these banks' futures. As the ratings on banks go down, it becomes more expensive for the banks to borrow the money that they need to cover the bad loans because investors lose confidence, and they want a higher return to fork over their money. And it's that lack of confidence that the government and the industry are fighting in this credit crunch.
BRAND: Thanks, John. That's John Dimsdale of public radio's daily business show, Marketplace.
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