Lehman Considers 'Good Bank/Bad Bank' Split

Sheltering troubled mortgage debt expected to bolster confidence

By Clay Dillow, Newser Staff

Posted Sep 5, 2008 10:22 AM CDT

(Newser) – Lehman Brothers is considering splitting itself into two banks, a “bad bank” to house its $30 billion in troubled mortgage and real estate holdings, and a “good bank” to carry on with the help of a new investor or two, the New York Times reports. The move, which is not unprecedented, may be necessary to re-instill confidence in the beleaguered institution.

Sheltering bad mortgage debt in the “bad bank” would offer shareholders a means to bet on commercial real estate’s turnaround while encouraging other institutions to do business with Lehman’s “good” arm. "Management is in a quandary—the commercial mortgage is performing too well to be dumped in a fire sale but, yet on the other hand, the equity market appears to want it gone," one analyst wrote this week.

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Lehman Brothers' New York headquarters is shown in this March 18, 2008 file photo. The bank may split to create confidence in its better assets as its mortgage investments languish. (AP Photo/Mark Lennihan, File)

Lehman brothers, beleaguered by the credit crisis, is considering splitting itself into two banks. (AP Photo/Katsumi Kasahara)

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Management is in a quandary — the commercial mortgage is performing too well to be dumped in a fire sale but, yet on the other hand, the equity market appears to want it gone. - David Trone, analyst, Fox-Pitt Kelton

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Lehman Considers 'Good Bank/Bad Bank' Split