Goldman, Sachs Could Lose $112 Million : U.S. Underwriters Worse Off Than British in BP Flop

NEW YORK — Despite the safety net hurriedly put in place by the British government, U.S. and Canadian underwriters will be left holding many of the unwanted new shares in British Petroleum and nursing losses of up to $500 million, securities analysts say.

Because of the differences in U.S. and British underwriting methods, the U.S. firms actually face bigger losses than their London counterparts, they say.

The flotation of the 1.2 billion new shares in British Petroleum was one of the biggest flops in history.

When the shares, representing 31.5% of BP plus some new stock, were priced a few weeks ago at $5.64, they offered the usual discount below the market price, thus ensuring large demand. But after the pricing, the world financial markets went into a tailspin, pushing current BP shares well below $5.64.

This meant the investment banks underwriting the stock were left holding the shares, or unloading them at fire sale prices. There were also fears that such widespread selling on the still jittery markets would drive all stocks into another crash.

To prevent this, the British government set a floor price by offering to purchase the shares at a discount.

The shares are sold in three installments, with the first worth $2.05. But on the open market, the partly paid for shares would be worth only around $1.20. The government said that if necessary it would buy any and all shares at that level, thus setting a floor on the market.

This limited the loss of the investment banks to a still-sizable $1.8 billion.

“If you’re a portfolio manager, you’ll have enough explaining to do at the end of the quarter without having to explain why you bought BP,” one securities analyst said.

U.S. investment banks, who underwrote 480 million shares, said they stand to lose at most $400 million, or $200 million after tax, because of the buyback program.

In Britain, the losses are widely spread, with numerous secondary underwriters. This ensures that no single firm is holding more than 1% of the shares, and thus 1% of the total loss.

But in North America, such syndication takes place only after the shares are priced, and when the syndicates were just being put together, the stocks crash hit. This left the major underwriters holding the bag.

Goldman, Sachs and Co., the lead U.S. underwriter committed to 28% of the U.S. portion of the offer, faces losses of around $112 million, or $56 million after tax.

Morgan Stanley and Co., Shearson Lehman Bros. and Salomon Bros. each hold 24% of the U.S. stake, and each faces up to $96 million in losses.

The most heavily exposed of the Canadian firms, who were also active, was Wood Gundy Ltd., which was committed to about 53 million shares and now faces a loss of $45 million. Because of the potential loss, First Chicago Corp., the largest bank in the Midwest, said it would reconsider its plan to pay $200 million for a 35% stake in the Canadian firm.

The first day of trading went well, with the psychological support of the government floor price ensuring steady demand. The first installment of the shares was selling at around $1.47 in London, well above the issue price. Volume was also heavy.

“Right now the losses are roughly $300 million” for the U.S. underwriters, one trader said.

But traders and analysts pointed out that the market could change quickly and fall to the support price in coming days.

Investors who were considering buying BP would more likely buy the shares of other large oil companies, they added, which are not facing the burden of millions of new shares hitting the market.