Lehman trading hurt by counterparty worry: analyst

NEW YORK (Reuters) - Lehman Brothers Holdings Inc LEH.N has seen its trading earnings hurt as clients worry about the credit strength of unregulated derivatives units, although it has sufficient capital and access to government funding, a veteran brokerage analyst told clients on Thursday.

But another well known analyst at Deutsche Bank maintained his "buy" rating on the stock, which surged 7.8 percent, making it the top gainer among brokerage stocks and adding to gains on Wednesday, when it was helped by a vote of confidence from a top bond manager.

After the market closed, CNBC television reported Lehman was considering announcing earnings a week early to calm market concern about its finances. CNBC also said Lehman was mulling a rights offering to raise more capital.

Lehman spokesman Brian Finnegan declined to comment on the report, which did not cite sources.

Lehman shares sank 19 percent the first two days of this week as some investors speculated the fourth-largest investment bank will report a larger-than-expected quarterly loss and be forced to raise as much as $4 billion of new equity.

Brad Hintz, who follows brokers for Sanford Bernstein, said that, while broker-dealer units in the United States, United Kingdom, Japan and Germany "are still being fully accepted by the market, cautious credit officers at clients of the firm are limiting trading with the unregulated derivatives subsidiaries of the company."

As a result, Hintz reduced his third- and fourth-quarter earnings estimates for Lehman to $1.13 and $1.10 per share, respectively, down 11 cents each, anticipating reduced earnings from the trading of debt, equities and commodities derivatives.

HEDGING LOSSES

Hintz, a former Lehman chief financial officer, reduced his 2008 earnings estimate to $3.20 from $3.42 and his 2009 estimate to $5.95 from $6.11.

"We recommend investors remain on the sidelines with Lehman until the firm demonstrates a reduction in leverage and lowers its exposures to troubled asset classes," Hintz said.

Lehman declined to comment.

Deutsche Bank analyst Mike Mayo, who reiterated his "buy" rating on the stock, also lowered its price target and 2008 earnings estimates, citing higher-than-expected hedging losses and assumption for a new $4 billion common equity offering.

The brokerage cut its price target to $49 from $52 and reduced 2008 earnings view to $2.45 from $3.60 a share.

The cost of insuring Lehman Brothers' debt with credit default swaps tightened on Thursday, according to data from Phoenix Partners Group.

Hintz, in his client note, added that Lehman's fixed income derivative business is under pressure after Standard & Poor's cut Lehman's credit rating to single-A from A-plus.

"Such a downgrade makes it less likely for counterparties to enter into long-dated derivatives," he said and that will erode profit.