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Lehman Profit Up 27% on Strength in Stock Trading, Buyouts

Lehman Brothers, the nation's fourth-largest investment bank, said Tuesday robust stock trading and buyout business pushed second-quarter profit up 27 percent year-over-year.

For the three months ended May 31, profit after paying preferred dividends rose to $1.26 billion, or $2.21 per share, from $986 million, or $1.69 per share, a year earlier.

Gains from stock trading amid a record run on Wall Street, as well as fees charged to companies for advice on takeover deals, helped drive Lehman's business during the quarter. Revenue rose 25 percent to $5.51 billion from $4.41 billion a year prior.

Results topped Wall Street projections for earnings of $1.88 per share on revenue of $4.97 billion, according to analysts polled by Thomson Financial.

Chairman and Chief Executive Richard Fuld said in a statement the bank's diversification efforts contributed to strong growth in non-U.S. net revenue, which represented nearly half of total net revenue for the quarter.

Fuld, who has led Lehman since it was spun off from American Express in 1994, has transformed the company into one of Wall Street's biggest investment banks.

While Lehman's bond business has traditionally been its biggest revenue stream, Fuld has steered the bank into more profitable businesses globally, such as merger and acquisition advisory.

Diversifying the firm has allowed Lehman to remain profitable even as some of its key businesses lag. For example, this year the company has been able to compensate for weakness in its mortgage banking business related to subprime loans.

Equity trading drove Lehman's capital markets business to $3.6 billion from $3.1 billion year-over-year, a gain of 17 percent. However, the fixed income segment of that business -- which includes bonds, derivatives and credit products -- fell 14 percent to $2.2 billion because of 'continued weakness in the U.S. residential mortgage business.'

There has been continued concerns since the start of the year about how major Wall Street firms would deflect losses in their mortgage-backed securities business caused by the slump in the housing industry. Lehman is the biggest U.S. underwriter and purchaser of mortgage loans, which the company then packages into securities.

Top executives at the firm have said recently that its exposure to mortgage loans represents less than 3 percent of total revenue during the past 18 months. Lehman has spent most of this year trimming that exposure after anticipating weakness in the industry at the end of last year.

Lehman's investment banking unit posted revenue of $1.2 billion, up 55 percent from $741 million a year earlier. The flurry of takeover deals during the quarter caused many companies to seek financing, driving Lehman's debt origination up 87 percent to $530 million and equity origination up 60 percent to $333 million.

During the quarter, Lehman advised Tishman Speyer in its takeover of real estate investment trust Archstone-Smith Trust, a $22.2 billion deal including debt. It also advised CVS Corp. on its $21 billion acquisition of Caremark Rx Inc.

Lehman's results kicked off the earnings season for four of the top five Wall Street investment banks. Financial firms have had an unprecedented run during the past four years, capitalizing on record M&A and equity markets -- but analysts believe that could erode this year.

Goldman Sachs , the nation's biggest investment bank by market value, and Bear Stearns Cos., the fifth biggest, will report results on Thursday. Morgan Stanley , the No. 2 U.S. investment bank, will report early next month.

Shares of Lehman, which fell 10.8 percent during the second quarter on fears about its exposure to subprime lending, closed at $75.68 on Monday. Shares rose $1.12 to $76.90 in premarket electronic trading.

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