| NEW YORK
NEW YORK Lehman Brothers Holdings Inc LEH.N
said on Tuesday its first-quarter earnings dropped 57 percent
as it wrote down bonds, but its shares surged after the bank
said it has more than enough capital to do business in the
Lehman's better-than-expected results, helped by strong
revenue in merger advisory and asset management, came two days
after a run on the bank forced Bear Stearns Cos BSC.N to sell
itself to JPMorgan Chase & Co (JPM.N)
The news sent Lehman's shares up 46 percent to $46.49,
their best trading day on record.
"Investor expectations were so low that this was a breath
of fresh air," said Matt McCormick, portfolio manager at Bahl &
Gaynor in Cincinnati, Ohio.
Lehman, the fourth largest U.S. investment bank, said it
has not lost any access to the repo markets, a crucial source
of short-term financing. Speculation that Lehman was losing
access to this funding and that it could also face a run on the
bank torpedoed its shares on Friday and Monday.
Despite investors' relief, Lehman Chief Financial Officer
Erin Callan struck a cautious note during a conference call.
"We don't think this extremely challenging period is going
to end in the near term," she said.
But, she added, "We believe we have the leadership, the
experience, the risk management discipline, the capital
strengths, and certainly the liquidity to ride out the cycle."
The rest of the year could be difficult, but 2009 may look
up, Callan told Reuters.
Lehman said it earned $489 million, or 81 cents a share, in
the quarter ended Feb. 29, down from earnings of $1.15 billion,
or $1.96 a share, in the same period a year earlier.
Wall Street analysts had on average expected earnings of 73
cents a share, according to Reuters Estimates.
Declining securities values cut into results to the tune of
$4.7 billion, or $1.8 billion after accounting for benefits
from a decline in the value of liabilities.
Callan said that declines in asset values represented
market changes, which Lehman sees as "more temporary in
nature," rather than permanent drops in the expected cash flow
of the assets.
Many investors had expected much bigger write-downs, as the
the weakening U.S. housing market weighs on market prices of
mortgage assets previously seen as strong.
Lehman had about $68 billion of commercial and residential
mortgage-backed securities on its balance sheet as of Feb. 29,
and another $12.9 billion of real-estate related investments.
The Federal Reserve is trying to pump liquidity into the
U.S. financial system, and it cut interest rates by 0.75
percentage point on Tuesday to 2.25 percent.
A SILVER LINING, ATTACHED TO A CLOUD
Two of the strongest parts of Lehman's business were merger
advisory, where revenue rose 34 percent to $330 million, and
money management, where revenue was up 39 percent to $968
Merger revenue was helped by Lehman's role in advising
Britain's Imperial Tobacco Group PlcIMT.L on its 12.6 billion
euro ($19.9 billion) acquisition of Franco-Spanish Altadis and
on MGI Pharma Inc's acquisition by Japan's Eisai Co Ltd
(4523.T) for $3.9 billion.
But the volume of investment banking deals that have not
closed will likely decline, Callan said, echoing comments from
Goldman Sachs Group Inc (GS.N) CFO David Viniar.
Lehman Chief Executive Dick Fuld has piloted the company
through difficult markets before, most notably during the
Long-Term Capital Management crisis of 1998. Over the last
decade, the investment bank has boosted its ability to readily
The fourth-largest U.S. investment bank said as of the end
of the quarter it had $34 billion of liquid assets and access
to another $163 billion of assets that could be sold to meet
Lehman can also borrow directly from the U.S. Federal
Reserve as of Monday. The Fed typically lends only to
commercial banks but is allowed to lend to investment banks to
protect the stability of the financial system.
Net revenue fell 31 percent to $3.5 billion, hurt by
bond-trading revenue that fell to $262 million from $2.2
billion a year earlier.
Lehman Brothers, which was long seen as a bond house, is
now more diversified.
(Reporting by Dan Wilchins, editing by Mark Porter, Gerald
E. McCormick and Toni Reinhold)