Thursday, August 23, 2007

Lehman to shut down subprime unit

Lehman to shut down subprime unit
By Ben White and Victoria Kim in New York
Copyright The Financial Times Limited 2007
Published: August 22 2007 19:46 | Last updated: August 23 2007 00:47


Lehman Brothers intends to shut down its subprime mortgage unit, BNC Mortgage, shedding 1,200 jobs and, at least temporarily, leaving a business that has been highly profitable across Wall Street in recent years.

Lehman’s decision raises questions about whether other investment banks that acquired subprime lenders in recent months will have to close them or take big losses. Merrill Lynch paid $1.3bn for First Franklin and other subprime businesses last September and Morgan Stanley paid $706m for Saxon Capital in December.

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Questions were raised at the time about the price of each deal, which were made as cracks in the subprime market were appearing. Bank executives replied that the platforms were flexible and could be scaled down if business were to decline.

Lehman will take a charge against earnings of about $52m (£26m) to dispose of BNC; most of it in the third quarter. The charge is small compared with those of other groups that have left the subprime business, but the larger question is impact on future earnings as Lehman ceases to package subprime mortgages into securities for sale to investors.

Lehman shares are down about 24 per cent this year. Shares in Bear Stearns, another player in mortgage securitisation, have fallen about 29 per cent. Lehman shares rose 2 per cent on Wednesday.

Lehman will continue to originate mortgages by its Aurora Loan Services platform that focuses on Alt-A mortgages, which are closer to meeting prime mortgage standards. If the subprime business improves, Lehman will be able to issue subprime loans through Aurora.

Lehman reports third-quarter earnings next month. It may offer further details of exposure to the subprime market to dispel rumours that have plagued it and other banks. Lehman had said subprime activities accounted for less than 3 per cent of revenues in recent quarters.

Lehman’s action on Wednesday came as Accredited Home Lenders, a subprime lender, and HSBC announced combined losses of more than 2,000 jobs.

Accredited Home Lenders said it would cut 1,600 jobs, more than 60 per cent of its workforce, to boost liquidity after private equity group Lone Star backed out of its $400m purchase of the company. HSBC said it would cut 600 jobs.

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