updated 8/20/2008 7:28:12 PM ET 2008-08-20T23:28:12

The pressure is increasing on Lehman Brothers Holdings Inc. to come up with a plan to restore itself to financial health — or possibly face the worst-case scenario of selling itself off in pieces and at bargain prices.

The nation's fourth-biggest investment house is considered the most vulnerable amid the financial sector's continuing losses from the credit crisis. This week, Lehman has been the subject of analyst downgrades and projections that it will lose $4 billion in the third quarter. There is rising speculation — most of it negative — about its short-term prospects, leading more investors to bail out of Lehman stock, which closed Wednesday at $13.73, well off its 52-week high of $67.73.

Lehman needs to come up with a plan to purge itself of its risky mortgage-backed assets and raise new capital. But neither task is easy: Prospective buyers for those assets want to pay as little as they can get away with, and the big offshore investors that invested in Citigroup Inc. and Merrill Lynch & Co. months ago are wary about sinking more money into the financial industry.

What makes the situation harder for Lehman Chief Executive Richard Fuld is that Wall Street is still smarting from the near-collapse of rival Bear Stearns & Co. in March.

"If people think they (Lehman) are heading toward bankruptcy, nobody will want to do business with them or make them new loans. That's Fuld's biggest problem," said Richard Sylla, financial historian and economist at New York University's Stern School of Business.

Fuld, who took the company public in 1994 after splitting it off from American Express Co., is said to be considering the sale of all or part of Lehman's investment management arm. That includes the highly profitable money manager Neuberger Berman, which it bought for $2.6 billion in 2003.

That business, with about $277 billion under management, could fetch between $7 billion and $13 billion, according to analyst reports. It would be the latest move by Wall Street to sell off assets, including last month's sale by Merrill Lynch & Co. of its stake in news and data provider Bloomberg LP.

Buyers could potentially include large private equity firms, which were among the bidders for Bear Stearns before it was taken over by JPMorgan Chase & Co.

A spokeswoman for Lehman Brothers declined to comment about a possible sale of the division.

Another option for Lehman is to secure funding from a sovereign wealth fund or another big institution. However, reports that a deal to raise $5 billion from South Korean investors fell through points to the caution among potential investors.

"They are clearly not as keen on investing in the financial sector until the credit crisis plays out," said Elisa Parisi, lead finance and banking analyst for RGE Monitor. "Selling off assets would be at fire-sale prices — and investors will bark if you try and sell some of the crown jewels of the company."

Global banks and brokerages have been forced to raise new capital after writing down more than $300 billion of mortgage-backed securities and other risky investments in the past 12 months. Lehman currently has more than $60 billion of exposure to real estate and mortgage-backed securities.

Many of Lehman's troubled assets still have value, but the firm can't sell them because the market is just about paralyzed. It's likely that the only way to get the investments off Lehman's books is to sell them at a steep discount, much as Merrill Lynch did last month when it sold risky assets for 22 cents on the dollar.

"We anticipate that Lehman will reduce its overall mortgage exposure by 20 percent, suggesting about a $15 billion reduction," said Goldman Sachs analyst William Tanona in a note to clients. Though Lehman won't get much for the sales, analysts like Tanona believe that such a drastic step will help rid the bank of perceptions it is loaded with heavy risk.

If Lehman can also raise enough capital, the moves will "buy them some time, and allow them to emerge from the crisis and rebuild," Parisi said.

However, with the market changing so quickly, any missteps by Fuld could cost him not only the CEO job but the entire company. Selling off profitable pieces of Lehman might raise capital, but would hurt long-term profitability.

And there is also the possibility that Fuld might consider selling the company, possibly to a retail bank that has little exposure to turmoil in the credit markets.

"The finance sector needs massive consolidation," said Merrill Lynch strategist Rich Bernstein in a report. "There is simply too much lending capacity in the global economy."

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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