Investment bank pays price for late Australian push

Looking to capture a slice of booming merger and acquisition markets, Lehman made its local debut through the $120 million-plus acquisition of fixed-income specialist Grange Securities in January last year.

At the time, Lehman was the only major US investment bank lacking a presence in Australia and it outlined a plan to become a top-five player here in investment banking, equities and corporate finance, pitting itself against US rivals including JPMorgan and Goldman Sachs, Europe's UBS and local major Macquarie Bank.

Despite the already crowded local market, the Wall Street bank began a hiring spree in Sydney and Melbourne that included luring high-profile bankers from UBS and JPMorgan.

But since its arrival, Lehman has been at the centre of a storm.

BusinessDay has reported that hundreds of local councils, charities, churches, government agencies and super funds across the nation have been exposed to losses as a result of buying complex credit instruments, mostly from Lehman via a distribution deal it had with Grange Securities.

The investment bank is facing legal action, with NSW's Wingecarribee Shire Council claiming it lost millions of dollars investing in collateralised debt obligations.

Lehman failed to gain traction as the investment banking environment began slowing and was unable to make inroads into institutional equities trading, often the bread and butter for investment banks.

Meanwhile its US parent has been battling persistent rumours over its financial health following the collapse of Bear Stearns.

Latest accounts lodged by Lehman Brothers Australia show a $53 million loss during its first year in Australia due to hefty write-downs on credit instruments and a slowdown across its capital markets business.

The unusual reporting period reflects a move by the local franchise to align itself with the reporting period of its parent.

Even if Lehman survives here, many bankers fear a broader consolidation will take place, with at least two international players to cut back operations in the next year.

Among the Wall Street banks, Lehman has been among the hardest hit by the subprime crisis. It ranks as one of the biggest underwriters of mortgage-backed bonds and other mortgage-related securities.

Lehman has been involved in three Australian-linked M&A transactions this year, including BAE Systems' $775million move on defence company Tenix.

It advised Westpac's Hastings Funds Management business on a $US840 million purchase of power production assets from US utility Black Hills.

In the intensely competitive world of investment banking, deal flow and reputation are everything and Lehman is running short on both.