Lehman asset sale may be "necessary evil: Sandler

(Reuters) - A sale of Lehman Brothers' asset management business "may prove to be a necessary evil" if it provides the required capital to strengthen the No. 4 U.S. investment bank's balance sheet, according to analyst Jeff Harte at Sandler O'Neill Partners.

"We would prefer not to see Lehman sell its asset management operation, and we suspect management feels the same way," Harte said. "We suspect that management would be more willing to sell a minority stake than a majority stake."

But other asset managers would only be interested in a controlling stake and thus a sale to a private equity firm makes sense, said Harte, who believes Lehman's asset management business is worth about $8 billion.

Lehman was not immediately available for comment.

Blackstone Group LP and Kohlberg Kravis Roberts & Co are each looking to buy parts of Lehman's real estate and asset management units, sources familiar with the situation told Reuters on Friday.

Lehman, which has been flogged by losses and still bears more than $60 billion of mortgage and commercial real estate exposure, is under pressure to raise capital as Wall Street firms reel from the fallout of the subprime mortgage crisis.

"Lehman appears to have the balance sheet capacity to absorb $8 billion or more in additional problem asset write-downs and still maintain a tangible equity-to-tangible asset ratio above 4.0 percent," Harte said. "Management may actually have more capital than time on its side."

"Solvency concerns, like trading errors, do not age well," Harte said. "The longer the market frets about Lehman's balance sheet exposures, the more likely counter-parties are to pull back from the firm, which could cause lasting damage to its franchise."

Sandler expects Lehman to report a fourth-quarter loss of $3.50 a share, compared with prior forecast of a profit of 61 cents. The loss estimate reflects an additional $4.5 billion of write-downs in "problem asset."