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There is no question that investment banks are holding a great deal of bad debt. For some the banks, such as Lehman Brothers, the debt can be crushing. We will not go into whether they created their own problems as we all know the answer to that, but the focus is how banks are going to crawl out from under the  burden they have created.

Lehman Brothers is floating a trial balloon on their exit strategy out from under their real estate debt. Instead of selling off the debt like Merrill did, Lehman is looking to split the  company, one for their traditional business and the other full of bad real estate debt. This is called the Good Bank – Bad Bank model. The shareholders would own both banks but their risk is reduced.

If the bank full of the bad debt goes under the rest of Lehman is protected. Of course the cynic would say that the decision makers who invested in all that bad debt still have their old jobs, but we will conveniently forget that.

Under the plan, similar to a good-bank-bad-bank model, Lehman will put in about $8 billion of equity in the new company, the news agency said, citing unnamed sources.

The remaining $24 billion will be lent to the new company by Lehman or outside investors, it said. Shares of the company would be owned by Lehman’s current shareholders, it said.

The plan is one of several being considered, it said. Under another plan, Lehman would set up a company funded and run by outside investors to buy some of these assets, it said.

Related posts:

1. Mortgage Meltdown - Bank of America Buying Merrill Lynch - Lehman Going Under?
2. Lehman Selling 14 Billion in Real Estate To BlackRock?
3. Citigroup, Bank Of America, and JPMorgan To Fund 100 Billion Dollar Rescue Fund
4. Macklowe Giving New York Properties Back To Deutsche Bank
5. Hypo Real Estate Makes Offer for Depfa Bank PLC