Speedy action is the key, as Lehman battles for survival

The bank may still have a name and several good businesses but these ultimately count for nothing if sentiment is against it.

Once its everyday counterparties in the markets no longer believe it can survive, it won't. Like Gordon Brown, Lehman is discovering that once people think you are a loser, you become one.
Like Brown, it is largely its own fault.

When the crisis broke, management went into denial, blaming outsiders for trying to do it down, rather than accepting it had made mistakes that meant its multibillion-dollar business was imploding. Precious months were wasted because they believed they could still walk on water.

As a result, solutions were too half-hearted, too pricey, too little and too late. This crisis has been running for 15 months and Lehman has never got ahead of the curve.

The question is, what happens now? On the surface, the situation is reminiscent of Bear Stearns in March. It seemed to be holding on, then one day everyone decided to look the other way and it was doomed. A sell-out/bailout was its only option. So it is with Lehman.

Its boss Dick Fuld this week unveiled a plan to make disposals and raise capital to compensate for the departed Koreans. But while it might have been enough a month ago, it no longer seems credible.

Worse, Fuld's propensity to blame everyone but himself for the disaster makes him part of the problem, not part of the solution. He probably knows this — he sounds a broken man.

One must hope that emergency plans are being hatched in New York and Washington to put a rescue together in time for the market's opening on Monday.

The authorities there have had enough practice recently to be getting quite good at it. But if nothing happens, one despairs for Lehman. No one wants another week like this one.

Commercial property pain

Compared with the daily speculation about house prices, the commercial property sector has been relatively quiet. Valuations have plummeted of course, property funds have struggled to cope with investors wanting their money back, and buying and selling activity has slowed.

There has been the odd flurry of interest when owners demolish unlet factories rather than pay tax on the empty buildings, and there are doubts about the ability of tacky first-generation retail parks to survive a prolonged spending slowdown. But given what is happening in the economy, it has been remarkably stable.

But there may be trouble coming. One of the features of commercial property, both in its investment portfolios and development, is the extent to which it relies on short-term financing.

Typically, loans run for two years and in good times they are easily renewed.

However, these are no longer good times. The strains are showing in the boardrooms because most boards these days have non-executive directors who are only too aware of their wider responsibilities.

So while the chief executives are being gung-ho and upbeat, their non-execs are quietly taking legal advice.They want guidance on whether a company with a massive refinancing commitment six months out can properly be described as a going concern.

There is going to be tough talking. Banks will provide new capital if it suits them, but it depends on the quality of the assets in the company.

If they are prime, the replacement cash will be forthcoming, if significantly more expensive.

If the properties are secondary, or worse, tertiary, then the money may well not be available. Property companies with a mix, as many have, face tough negotiations.

This does not herald another sudden crash in valuations, but it does suggest the authorities are right to be worried about the banks' exposure to the commercial property sector.

And it suggests that while the best-quality properties may be reaching towards a floor, that may not be enough to stabilise the market in lower-quality assets.

The yield gap between these and the good stuff has already widened since the heady days of last year, but could go a lot further. A market that has so far avoided high-profile casualties may not be able to hold the line much longer.

Deleveraging is harder on the property sector than anywhere else because it is a business that lives on other people's money.

The upward spiral, which began in 2003 or thereabouts when the easy money started to flow, has now gone into reverse, and logically won't cease until we are back towards those 2003 values again.