Wall Street's Big Sell-Off

Lehman Brothers (LEH) might as well have a tattered and faded sign reading "liquidation sale" hanging from its Times Square headquarters. For months, the fourth-largest investment bank has been trying to sell assets—good and bad—to stay alive. It dumped $140 billion of holdings in the first quarter. Now Lehman is actively shopping its crown jewel, money manager Neuberger Berman, and it may be looking to unload some commercial real estate securities.

Lehman's air of desperation is the most potent form of fear wafting through Wall Street and Europe's financial capitals these days. Big banks are steeling themselves for another round of losses, which could prompt the biggest sale of assets since the credit crisis began more than a year ago. The potential size of the fire sales: roughly $2 trillion. Lehman declined to comment.

Vulture investors are raising record amounts, but there still may not be enough money to devour those assets. And if they hope to find a buyer at all, banks may be forced to cut their asking prices to the bone, which would batter their balance sheets even more. "The money is not there," says Joseph Mason, a professor at Louisiana State University. "We're going to see failed sales."

The fear is that if banks can't sell off enough assets, more firms will go the way of the late Bear Stearns and IndyMac. On Aug. 27 the Federal Deposit Insurance Corp., the regulator that oversees banks, reported the number of institutions on its so-called problem list spiked 30%, to 117, in the past quarter. "It's really an ugly time, and it's only going to get worse," says Christopher Whalen of Institutional Risk Analytics, a research and consulting firm.

The situation may well pressure the federal government to step in with a broad-based solution, one with an almost retro feel. Banking experts are starting to talk about the need for an updated version of the Resolution Trust Corp., the vehicle Congress created in 1989 to gather up assets from failed savings and loans and sell them off in an orderly fashion. The RTC was a reincarnation of the Great Depression's Reconstruction Finance Corp.

Hard Sell

Third-quarter financials, which firms deliver in the coming weeks, could set off the avalanche of sales. Credit analysts at J.P. Morgan Securities (JPM) estimate that banks worldwide will experience an additional $200 billion in losses and writedowns this period, on top of the $500 billion they've already taken. When the whole credit crisis is said and done, the full count could top $2 trillion by some gloomy estimates.

Until now, banks have replaced most of that lost capital with money from outside investors. But those funds are drying up. For one, it's getting harder to issue the type of special securities that sovereign wealth funds and others have found appealing when giving big cash infusions to Citigroup (C), Merrill Lynch (MER), and other struggling companies. Plus, many of those early movers may have buyer's remorse, considering that the value of their investments has eroded dramatically.

Without a white knight, banks will likely resort to dumping assets to maintain satisfactory capital levels for regulators and creditors. How much stuff could be up for sale? Generally speaking, commercial banks try to hold $1 of capital for every $10 of assets they own; for investment banks it rises to about $20. That means if banks and other financial firms lose the predicted $200 billion in the current period, there could be roughly $2 trillion of assets on the block, including prized possessions.

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