Lehman Says Worst Is Over

Shares rise after the CFO takes a hopeful view on the credit crunch.
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Lehman Brothers

(LEH)

shares rose 3.5% Tuesday after financial chief Chris O'Meara said the "worst of credit correction is behind us."

O'Meara made the comment on a midmorning conference call that the big brokerage firm used to defend the health of its balance sheet.

Shares in the New York-based investment bank rallied after Lehman posted a

stronger-than-expected fiscal third quarter. Earnings dropped 3% from a year ago but beat analysts' expectations -- in spite of a $700 million hit to revenue in its fixed-income business. That drop came from valuation adjustments tied to Lehman's holdings in troubled areas of the credit markets.

On a midmorning conference call, Lehman execs said the firm took "significant hits" during the quarter as it marked to market its leveraged loan book. Execs said the writedowns were "not a small amount" in excess of $1 billion. Lehman also said some losses in its fixed-income book had been offset by hedging.

The comments come as investors check Wall Street firms' third-quarter numbers for signs of distress tied to the credit crunch that started this summer. Fixed-income buyers fled the market for mortgage-backed securities after defaults spiked on recent loans to homebuyers with poor credit histories. The subprime mess scared investors away from riskier paper of all stripes, including the debt backing the recent wave of leveraged buyouts.

As a result, there have been fears that big firms such as fixed-income-heavy Lehman and

Bear Stearns

(BSC)

would be hit by hefty writedowns this week when they post third-quarter numbers. The procession of earnings reports --

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MS) - Get Report

are also due to post numbers this week -- comes as bankers try to begin finding buyers for more than $300 billion worth of LBO debt.

Lehman execs dismissed those concerns Tuesday, saying that debt tied to smaller deals has been getting placed and that rumors that big deals won't get funded "are just not right." Lehman said its exposure to so-called hung bridge loans is just $4 billion -- down from estimates as high as $44 billion at the end of the second quarter.

Shares rose $2.05 to $60.67.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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