Lehman Bros.’ earnings fall 3%

new york -- The mortgage crisis and credit crunch took a bite out of Lehman Bros. Holdings Inc.’s results for its latest quarter, but the company’s profit fell only 3%, easing concern that market upheaval would exact a brutal toll on Wall Street investment banks.

Lehman, the first of several banks to report results for the fiscal quarter ended Aug. 31, sought to allay concerns that investment banks might be moving too slowly to write off potentially large amounts of troubled mortgage securities.

“Barring any unforeseen circumstances, we feel that the worst of this credit correction is behind us,” Chris O’Meara, Lehman’s chief financial officer, said in a conference call with securities analysts.

Lehman -- which along with Bear Stearns Cos. is more heavily reliant on the fixed-income market than other investment banks are -- wrote down the value of assets on its books by $700 million to cover losses in mortgage securities and private equity loans. Meanwhile, revenue in its fixed-income capital-markets business slid 47% to $1.1 billion in the fiscal third quarter.

The company took “very substantial valuation reductions,” Lehman said in a statement.

The bank also recorded a $44-million charge for restructuring its mortgage business, including the closure of its sub-prime lending unit.

But those troubles were mostly offset by strength in areas including investment banking, stock trading, asset management and international operations.

Overall, net income for the three-month period was $887 million, or $1.54 a share, down modestly from $916 million, or $1.57, a year earlier. Analysts on average had forecast earnings of $1.48 a share.

“First take: The quarter could have been worse,” Michael Mayo, an analyst at Deutsche Bank, wrote in a note to clients.

Lehman’s shares rallied on the earnings report, then jumped sharply on news of the Federal Reserve’s half-point interest rate cut. The stock surged $5.87, or 10%, to $64.49.

With mortgage problems beginning to affect Wall Street firms’ quarterly results, skeptics suggest that to prop up earnings the investment banks might take advantage of accounting rules that give them discretion in determining the value of some troubled securities.

As the crisis continues to unfold, “How can they not have losses?” asked Peter Schiff, head of brokerage firm Euro Pacific Capital Inc. in Darien, Conn. “Can you imagine what they’ve got on their books and what they’re going to be stuck with?”

For Lehman’s part, O’Meara said the firm had a “robust process” to check its accounting for “accuracy and reasonableness.”

In any case, Schiff said, the future isn’t bright for Wall Street banks.

“They’re not going be making all these profits in their hedge funds,” he said. “They’re not going to be making all these [merger] deals and private equity deals. They’re not going to get all those tremendous fees and commissions.”

Lehman’s results indicated that certain parts of its business might have benefited from the market volatility set off by the sub-prime meltdown and credit squeeze.

Revenue at the firm’s equity capital markets unit rose 64% and commissions climbed 27%. Investment-banking revenue rose 48%.

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