Business

LEHMAN PROFIT DROP BEATS ESTIMATES

Dick Fuld’s Lehman Brothers was able to use some deft hedging and a lower tax rate to report better than expected earnings yesterday.

Seen as the proxy for all of Wall Street’s mortgage-and asset-backed securities woes, bond-heavy Lehman reported a smaller than expected profit drop, which sent bears scurrying as its stock price shot up more than 10 percent to close at $64.49.

Also fueling the frenzy was the statement of Lehman Chief Financial Officer Christopher O’Meara that “the worst of this credit correction is over.”

The Federal Reserve’s unusually strongly worded statement after its 50 basis point cuts in both the federal funds and discount rates provided additional buoyancy to speculators in financial stocks.

Euphoria aside, the numbers were not all sweetness and light.

Bond trading and underwriting revenues dropped $828 million, while firm wide revenue dropped $700 million.

Net income was $887 million, a 30 percent drop from the previous quarter and 3 percent down from the previous year.

The firm’s return on equity declined to 17 percent as of Aug. 31, from 21 percent a year ago.

Perhaps more alarming, between 10 percent and 11 percent of Lehman’s net assets, or about $35 billion, are so-called level III assets that are assigned values based on “management’s best estimate.”

These includes billions of dollars worth of securitized products that have seen sharp declines in price and liquidity in their markets evaporate.

According to analyst Dick Bove of Punk, Ziegel & Co., Lehman only beat Wall Street consensus estimates because it was able to use a lower tax rate, yielding $72 million in savings.

On the other hand, the $700 million in write-downs in Lehman’s mortgage- and high-yield loan portfolios were “well below the conservative potential mark down scenario,” said CreditSight’s David Hendler.