Breakingviews-Lehman could be 2013's Humpty Dumpty
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Antony Currie
NEW YORK, Jan 2 (Reuters Breakingviews) - Lehman Brothers could be the Humpty Dumpty of 2013. It’s not quite as crazy an idea as it sounds. The defunct firm's two biggest operating businesses – both snapped up by rivals in 2008 – could be up for grabs in the next 12 months. Stitching the old firm back together could be an enticing project.
Nomura (8604.T) has struggled since taking on Lehman's European and Asian operations - although cost-cutting helped the investment bank return to profitability in the three months to September. If the outlook doesn't improve, pressure will mount on the Japanese bank to call it quits. Meanwhile, Barclays (BARC.L) may offload the U.S. business, which it scooped from Lehman's rubble, as part of scaling back its trading and corporate finance unit.
There are no obvious buyers. European firms are shrinking. Wells Fargo (WFC.N), America’s fourth-largest bank by assets, might see Barclays' retreat as a way to establish itself on Wall Street. But investment banking is not its core strength, and would probably prompt regulators to designate Wells as systemically important, which would require it to hold more capital.
So why not put the two homeless divisions back together? The challenge would appeal to sidelined investment banking executives like Jes Staley, who was recently booted upstairs at JPMorgan’s (JPM.N) investment bank, or his predecessor, Bill Winters. Even Goldman Sachs’ (GS.N) second-in-command Gary Cohn might fancy a crack.
The overwhelming obstacle would be funding the new beast. Bondholders would probably want a new Lehman to maintain a much higher common equity ratio than the 8 percent or so held by Goldman and Morgan Stanley (MS.N). And those two are already failing to generate decent returns for shareholders.
That would probably scupper any attempts to put all the pieces back together again as a public firm. A smaller boutique focused just on advisory might have more luck. Recreating a private partnership, where senior executives have real skin in the game, might make investors and counterparties more supportive.
The quandary highlights investment banking’s problem in a nutshell: if you're not already a dominant player, why bother? UBS (UBSN.VX) has already quit much of its fixed-income trading. The struggle of tackling Lehman’s possible Humpty Dumpty status suggests others may soon have to follow.
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(Editing by Peter Thal Larsen and Martin Langfield)
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