Lehman files for bankruptcy, plans to sell units

By Dan Wilchins

NEW YORK (Reuters) - Lehman Brothers Holdings Inc filed for bankruptcy after trying to finance too many risky assets with too little capital, becoming the largest and highest-profile casualty of the global credit crisis.

Based on assets, Lehman far surpassed WorldCom as the largest U.S. bankruptcy ever. Lehman had assets of $639 billion at the end of May, while WorldCom had $107 billion when it filed for bankruptcy protection in 2002.

The Chapter 11 filing did not include Lehman's broker-dealer operations and other units, such as asset management firm Neuberger Berman. Those businesses will continue to operate, although Lehman is expected to liquidate them. Lehman said it is in advanced talks on selling its investment management division.

Lehman is the biggest investment bank to collapse since 1990, when Drexel Burnham Lambert filed for bankruptcy amid a collapse in the junk bond market.

Time is of the essence as Lehman sells assets. Customers are often reluctant to trade with dealers whose parent companies are in bankruptcy, so the longer Lehman waits to sell its broker-dealer unit, for example, the less that unit will be worth.

"Much of (Lehman's) asset value at the end of the day is tied up in its credibility, and that takes a significant hit early in a bankruptcy case," said Jack Williams, resident scholar at the American Bankruptcy Institute and a professor at Georgia State College of Law.

The bankruptcy filing represents the end of a 158-year-old company that survived world wars, the Asian financial crisis and the collapse of hedge fund Long-Term Capital Management, but not the global credit crunch.

Financial institutions globally have recorded more than $500 billion of write-downs and credit losses as the U.S. subprime mortgage crisis has spread to other markets.

Bankruptcy also represents a bad end to Chief Executive Dick Fuld's four-decade career at Lehman. Fuld, who piloted the investment bank through prior crises with aplomb, was widely seen as too slow to recognize Lehman's need to raise capital and shed bad assets.

At the end of August, Lehman had $600 billion of assets financed with just $30 billion of equity. Having so little capital meant that a 5 percent decline in assets would wipe out the value of the company, which investors saw as a real risk due to the company's billions of dollars of mortgage securities.

"Lehman decided to play chicken with the market and they lost," James Ellman, portfolio manager at hedge fund Seacliff Capital, said late on Sunday.

In its Chapter 11 filing, Lehman named Citibank N.A. and Bank of New York Mellon as trustees for about $138 billion of senior Lehman bonds.

It said Citi's Hong Kong affiliate had made a $275 million bank loan to Lehman.

Among Lehman's other unsecured creditors are Japanese banks Aozora Bank, Mizuho Financial Group Inc, Shinsei Bank and UFJ Bank. France's BNP Paribas is also on Lehman's list of its 30 largest unsecured creditors.

The firm said that as of May 31, it owed about $110.5 billion on account of senior unsecured notes, $12.6 billion on account of subordinated unsecured notes, and $5 billion on account of junior subordinated notes.