Big Winner in Lehman's Bust is Barclays Bank

Barclays PLC, one of the largest investment banks in the United Kingdom, agreed Sept. 16, 2008, to buy the bulk of Lehman Brothers Inc. for $1.75 billion.

Lehman, the fourth largest investment bank in the United States, is one of the latest victims of the subprime mortgage crisis that led to the government bailout of Bear Stearns in March and the takeover of mortgage giants Fannie Mae and Freddie Mac by the U.S. Treasury earlier in September.

Worth as much as $45 billion in early 2007, Lehman reported almost $4 billion in writedowns in the third quarter, has seen its stock price collapse and was faced with punitive downgrades in its credit rating -- which would have made it extremely difficult to raise much-needed capital.

Dick Fuld, the head of Lehman, has been desperately seeking a buyer for the company. He may have been hoping to score a deal similar to JP Morgan Chase & Co.'s purchase of Bear Stearns, which was facilitated by a U.S. government guarantee to back the failing bank's bad debt.

U.S. Treasury Secretary Henry Paulson made it clear the government would not provide such support this time, however, and neither of the interested parties -- namely Barclays and Bank of America -- were willing to acquire Lehman without it.

Quickly running out of options, Fuld sought Chapter 11 bankruptcy protection for Lehman on Sept. 15. Under Chapter 11, which shields a company from creditors' lawsuits while it reorganizes its finances, Lehman became more appealing to Barclays. The British bank could buy Lehman's choicest bits without assuming its more than US$600 billion in liabilities, according to the Wall Street Journal ("Lehman, Workers Score Reprieve," Sept. 17, 2008).

A press release on Barclays's Web site stipulated that under the terms of the deal, which is subject to approval by the bankruptcy court, Barclays will acquire Lehman's North American fixed-income and equities sales businesses, as well as its trading, research and investment-banking operations.

These Lehman units employ about 10,000 people. Barclays will also buy Lehman's New York head office and two data centers in New Jersey.

As the Wall Street Journal put it, Barclays's purchase includes most of Lehman's "people, franchise, brand name, technology and clients but (not its) risky trades and liabilities that had hurt Lehman in the markets" before it sought bankruptcy protection.

With the acquisition, Barclays will be able to expand its stock-underwriting and merger-advice businesses, two areas that the British bank had trailed Lehman. The U.S. investment bank ranked No. 7 in global equity underwriting this year, according to Bloomberg, while Barclays wasn't listed among the top 25.

Barclays will not be buying Lehman's asset-management business, according to the Wall Street Journal. The U.S. investment bank is seeking other buyers for this division, which includes Neuberger Berman.

Sources:
"Lehman, Workers Score Reprieve," Wall Street Journal, Sept. 17, 2008: http://online.wsj.com/article/SB122156586985742907.html
"Barclays to Buy Lehman U.S. Units for $1.75 Billion," Bloomberg, Sept. 16, 2008: http://www.bloomberg.com/apps/news?pid=20601087&sid=aLsMT_psdKqk
"Barclays announces agreement to acquire Lehman Brothers North American investment banking and capital markets businesses," Barclays.co.uk, Sept. 16, 2008:http://www.newsroom.barclays.co.uk/content/Detail.asp?ReleaseID=1435&NewsAreaID=2
"Nightmare on Wall Street," Economist.com, Sept. 15, 2008: http://www.economist.com/finance/displaystory.cfm?story_id=12231236