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Lehman Limps Past Estimates

Revaluations cut revenue in the last quarter by about $700 million.

Lehman Brothers

(LEH)

rose 2% in premarket trading after the brokerage firm posted better-than-expected third-quarter earnings.

The New York securities firm said earnings of $1.54 a share in the quarter beat the average analyst estimate by 7 cents.

Still, Lehman's profit for the three months ended Aug. 31 dropped 3% from the year-earlier period and 29% from the second quarter to $887 million. Revenue rose 2% from a year earlier but fell 22% from the second quarter to $4.3 billion, the company said.

"Despite challenging conditions in the markets, our results once again demonstrate the diversity and financial strength of the Lehman Brothers franchise, as well as our ability to perform across cycles," said Chairman and CEO Richard S. Fuld Jr. "For the quarter, we reported record net revenues in investment management, and our second-highest net revenues in both investment banking and equities capital markets.

"In addition, more than half of our net revenues for the quarter came from outside the U.S. We remain focused on delivering significant long term value for our clients and shareholders," he continued.

The quarter was marked by turmoil in both the mortgage markets and the larger global credit markets. As delinquencies and defaults rose in mortgages offered to borrowers with less than perfect credit histories, demand for mortgage-backed securities virtually collapsed this summer as investors shunned the risky investments.

The downturn also crimped the leveraged buyout boom that had been so lucrative for big banks and brokers.

During the quarter, the firm recorded "very substantial" valuation reductions, "most significantly on leveraged loan commitments and residential mortgage-related positions," Lehman added. "These losses were partially offset by large valuation gains on economic hedges and other liabilities. The result of these valuation items was a net reduction in revenues of approximately $700 million."

Revenue from Lehman's capital markets business dropped 14% from a year earlier to $2.4 billion. In particular, the company's fixed-income business dropped 47% to $1.1 billion "primarily due to lower performances within credit and securitized products," the company said.

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Lehman's equities capital markets business saw revenue rise 64% -- its second-highest net revenue quarter -- to $1.4 billion. Investment banking also reported strong results, up 48% to $1.1 billion.

Lehman's shares rose $1.29 to $59.91 before the market opened. Shares of other big brokers, including

Goldman Sachs

(GS) - Get Report

,

Morgan Stanley

(MS) - Get Report

and

Bear Stearns

(BSC)

-- also set to report third-quarter earnings this week -- rose between 1% and 2%.