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Lehman Brothers Dons Brokerage Crown

It's been a banner year for brokerage stocks, but few have outshone Lehman Brothers (LEH).

To date, shares of the Wall Street firm are up a robust 45%, far outpacing the 30% gain racked up this year by the Amex Broker Dealer Index. And it's no contest comparing Lehman's performance with the meager, single-digit gains posted by the three major market indices.

Look for Lehman to help set the pace in the brokerage sector when it reports fourth-quarter earnings next week, along with Bear Stearns (BSC), Goldman Sachs (GS) and Morgan Stanley (MWD).

On the basis of the latest Thomson Financial estimates, analysts expect earnings at Lehman to rise 34% in the fourth quarter, which ended Nov. 30. Only Goldman Sachs is expected to do better, with earnings predicted to rise 40% over the same period last year.

Bear Stearns and Morgan Stanley are likely to be the laggards. Analysts expect earnings at both securities firms to be largely unchanged from a year ago.

Earnings at Bear Stearns also could be weighed down by another legal charge stemming from the firm's involvement in the more than two-year-old mutual fund trading scandal. Bear, after six months of heated negotiations, is close to reaching a final settlement with the Securities and Exchange Commission, sources say.

To date, Bear Stearns has set aside at least $200 million to cover the cost of reaching a settlement; sources expect a final deal to exceed $300 million. A Bear Stearns spokesman declined to comment on the investigation.

But the big story next week undoubtedly will be Lehman's continuing transformation into a diversified securities firm that's no longer just associated with bond trading and debt underwriting. Much of Lehman's metamorphosis can be attributed to its shrewd purchase of the asset-management firm Neuberger Berman in 2003 and a timely decision to beef up its merger-and-acquisition investment-banking group.

The wisdom of those moves is being borne out in this year's results.

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