Sept. 10 (Bloomberg) -- Lehman Brothers Holdings Inc., reporting the biggest loss in its 158-year history, said it will sell a majority stake in its asset-management unit, spin off real-estate holdings and cut the dividend in an effort to shore up capital and regain investor confidence.

Lehman fell almost 7 percent in New York trading after posting a $3.9 billion third-quarter loss on $5.6 billion of writedowns, worse than the $2.2 billion loss analysts had predicted. The company said it's auctioning off about 55 percent of the asset-management group, including fund-manager Neuberger Berman, and didn't name potential bidders. The real-estate spinoff is expected to be completed in the first fiscal quarter of 2009, according to a statement today.

Pressure on Lehman's Richard Fuld, the longest-serving chief executive officer on Wall Street, mounted yesterday after talks with Korea Development Bank ended, sending the shares tumbling 45 percent. Fuld is striving to convince investors that the fourth-largest U.S. securities firm will stem losses as housing prices decline. He and his management team also must keep clients and employees from leaving the company.

``Fuld is resolute and strong-willed, but that doesn't make him right,'' John Gutfreund, the president of Gutfreund & Co. in New York and former head of Salomon Brothers, said in an interview. ``You have one big asset in the money management business. Owning half of Neuberger doesn't make a lot of sense to me.''

Default Protection

Lehman declined 54 cents, or 6.9 percent, to $7.25 at 4:01 p.m. in New York Stock Exchange composite trading, as the cost to protect against a default by the firm rose. Credit-default swaps on Lehman jumped 100 basis points to 575 basis points, according to broker Phoenix Partners Group. That approached a previous peak of 580 basis points in March after the collapse and emergency sale of Bear Stearns Cos. to JPMorgan Chase & Co.

``This is an extraordinary time for our industry and one of the toughest periods in the firm's history,'' Fuld, 62, said in the statement.

The global credit-market meltdown has led to more than $510 billion of writedowns and credit losses since it began a year ago, sending financial shares around the world swooning. Lehman, the worst performer on the 11-company Amex Securities Broker/Dealer Index this year, has lost 89 percent.

The New York-based securities firm moved its third-quarter financial report up a week after a person familiar with the matter said yesterday that talks with state-owned Korea Development had ended, causing the stock to sink.

BlackRock Deal

``People are relieved that they have come out with some type of announcement,'' Rose Grant, managing director at Eastern Investment Advisors in Boston, said in a Bloomberg Radio interview today. ``That they are able to sell off certain divisions, get some more capital in here, I think that's all a relief.''

Lehman is ``formally engaged with'' BlackRock Inc., the biggest publicly traded U.S. fund manager, to sell about $4 billion of the investment bank's U.K. residential mortgage holdings, according to today's statement. Lehman said the transaction would help reduce the firm's stake in home mortgages by 47 percent to $13.2 billion.

``They are saying `we are fine now,' and that's buying them time to negotiate for that additional capital,'' Brad Hintz, an analyst at Sanford C. Bernstein in New York and former Lehman finance chief, said in a Bloomberg Television interview. ``They will need capital as part of the spinoff.''

Fuld's Forecast

Lehman Chief Financial Officer Ian Lowitt said on a conference call with analysts today that the firm wouldn't require additional capital for the transaction.

The company said it plans to shed $25 billion to $30 billion of commercial real estate investments by placing them in a separate publicly traded company, to be called Real Estate Investments Global, in the first quarter in 2009. Lehman also said it will cut its dividend to 5 cents per common share from 68 cents.

``It's still this incrementalism that I think ultimately Wall Street's not going to be very satisfied with,'' Chuck Carlson, a portfolio manager at Horizon Investment Services in Hammond, Indiana, said in a Bloomberg Television interview. ``Lehman is trying to cling to the fact that they came out of this independent and I'm not so sure that that's going to be the case.''

Fuld, in today's conference call, said that given the extent of the writedowns in the quarter, he doesn't expect to book more heavy losses on commercial mortgages before the spinoff is completed.

KKR, Bain

``We do not envision any large writedowns in the commercial mortgage portfolio given the present market,'' Fuld said.

Shareholders' equity grew to $28.4 billion at the end of August, up from $26.3 billion in the previous quarter, as capital the firm raised in June offset mortgage writedowns.

Gross leverage -- the ratio of total assets to equity -- fell to 21 times from 24. The company's so-called Tier 1 capital, which regulators monitor to gauge banks' ability to withstand losses, rose to 11 percent from 10.7 percent.

The Wall Street investment bank has been in talks with Kohlberg Kravis Roberts & Co., Bain Capital LLC and other private-equity firms interested in buying its asset-management unit, people briefed on the talks said on Aug. 27.

Final bids from potential buyers for the stake are due ``very, very soon,'' Lehman finance chief Lowitt said on the conference call. While it will be clearer from those bids whether any of the bidders is demanding financing, Lehman doesn't expect that be the case, Lowitt said.

Job Cuts

Any deal may not be completed until next month, according to a person with knowledge of the matter who declined to be identified because the talks are confidential.

Fuld blundered by not getting out of mortgage securities fast enough after the U.S. housing market began to crumble last year, said Richard Bove, an analyst at Ladenburg Thalmann & Co. Fuld also moved too slowly to bring in a capital infusion from outside investors, Bove said.

``The opportunity has been there, but the lack of willingness to deal on Fuld's part has been huge,'' Bove said.

Once the biggest U.S. underwriter of mortgage-backed securities, Lehman was stuck with the assets after two Bear Stearns hedge funds that invested in the instruments collapsed in July 2007, causing the market to freeze.

S&P, Moody's

The ensuing credit contraction ultimately led to the takeover of Bear Stearns by JPMorgan for $10 a share in a deal backed by the U.S. Federal Reserve. Banks and brokerages, trying to reduce costs as revenue dried up, have cut more than 110,000 jobs.

Standard & Poor's reiterated today it may lower its A1 long- term rating on Lehman because the ``precipitous decline'' in the share price creates uncertainty about the firm's ability to raise additional capital. S&P said Lehman's liquidity is ``sound,'' noting the firm has the ability to borrow from the Federal Reserve.

Moody's Investors Service said it was reviewing its ratings for Lehman, and may lower them if the firm fails to reach a ``strategic arrangement.''

``A strategic transaction with a stronger financial partner would likely add support to the ratings,'' analyst Blaine Frantz said in the Moody's statement.

Bear Stearns, which was the fifth-largest U.S. securities firm, was forced to sell itself or face bankruptcy as clients pulled their funds and other firms refused to trade with it.

Disasters Averted

Bear Stearns was the largest underwriter of mortgage-backed assets for three years before 2007, when Lehman displaced it in the rankings. The Fed agreed to take on $32 billion of mortgage assets from Bear Stearns's books to enable the sale of the firm to JPMorgan.

Founded in 1850 by three Jewish immigrants from Germany, Lehman has managed to avert previous potential disasters and is now among the handful of U.S. financial firms that have endured for more than a century.

Lehman has been on the verge of collapse at least four times: in 1929, when the stock market crashed; in 1973, when the firm lost $6.7 million betting on interest rates; in 1984, when internal dissension led to a takeover by American Express Co.; and in 1994, when newly independent Lehman faced a capital shortage.

Lehman's second-quarter loss of $2.8 billion was its first as a publicly traded company.

Management Shuffle

``I hope Lehman doesn't succumb this time either because we're running out of investment banks,'' said Sean Egan, president of Egan-Jones Ratings Co. ``And it takes 100 years to create a good one.''

Fuld, who joined Lehman in 1969, attempted to shore up the firm's finances last quarter by raising $14 billion of capital, selling $147 billion of assets, increasing cash holdings and reducing its reliance on short-term funding to create a buffer against a possible bank run. He replaced his second-in-command, Joseph Gregory, with Bart McDade, a 49-year-old known within the firm for his cautious approach to risk taking.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: September 10, 2008 16:15 EDT