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Lehman CEO Fuld Confident Despite Firm's Big Loss

Lehman Brothers Holdings' chief executive expressed confidence in the investment bank on Monday, sending its shares up as much as 9 percent even as it posted its first quarterly loss as a public company.

Lehman Brothers
Bert van Dijk
Lehman Brothers

CEO Dick Fuld, who managed Lehman through difficult periods in the 1990s, said the company's franchise and capital position are strong, even after it recorded $3.7 billion of write-downs during the quarter, leading to the $2.8 billion loss it forecast last week.

"We've made a number of changes. It's now my job to make sure that we execute," Fuld said on a conference call with investors.

The 62-year-old executive has been with Lehman since 1969 and has been CEO since 1993.

He has been largely absent from public view during the recent turmoil at the bank, but told investors on Monday that the quarterly loss "is my responsibility." Clouds remain at the bank.

Its shares have not recouped all of their decline last week, when the company forecast the quarterly lossand demoted its chief financial officer and chief operating officer amid a crisis in confidence.

The shares, up $1.57 to $27.38 in Monday afternoon trade, are still below their book value, or net accounting value, of $32.95, implying that investors see more write-downs coming at the fourth-largest U.S. investment bank.

"That's the $64,000 question for all the brokers: What is their actual book value?" said Jeff Harte, analyst at Sandler O'Neill in Chicago. "That's definitely what people are concerned about."

Harte rates Lehman "hold." Lehman has more than $60 billion of mortgages and asset-backed securities on its books, an amount well in excess of the company's net worth, which could bring more write-downs.

Lehman said its loss amounted to $5.14 a share for the fiscal second quarter ended May 31, compared with net income of $1.27 billion, or $2.21 a share, a year earlier.

The loss was Lehman's first since it was spun off from American Express in 1994.

Although write-downs have triggered big quarterly losses at rivals like Morgan Stanley, Lehman had managed to avoid posting a net loss until today.

Short sellers including David Einhorn, who profit if Lehman's shares decline, have said the investment bank has not taken the losses it ought to under accounting rules.

As the smallest of the major U.S. investment banks wrestles with questions about its future, many analysts have speculated that it could be a takeover candidate.

In response to a question on the call, Fuld said, "I have said many times that I very much believe that with this franchise's strength and power, we can go it alone." But he added that if a potential buyer comes forward, he has an obligation to take it to the board of directors.

Goldman, Morgan Stanley

The extent of possible future write-downs is a key consideration for investors as they prepare for quarterly results from Goldman Sachs Group on Tuesday and Morgan Stanley on Wednesday.

Rumors of trading losses at Goldman Sachs, long seen as a savvy risk taker, triggered drops in the company's shares last week.

The widening subprime mortgage crisis has forced financial institutions globally to write down more than $400 billion of assets.

Amid these massive drops in asset values, regulators and investors have been pushing banks to borrow less and hold more capital against their assets, in a process known as "deleveraging." Deleveraging should result in lower profitability for financial institutions.

Lehman, which posted a return on equity above 20 percent last fiscal year, said on Monday it expects a return on equity in the mid-teens in the future, but that depends on its generating close to $5 billion of revenue a quarter, well above the $4.2 billion of the most recent quarter, excluding write-downs.

There are some signs that business is turning around. Lehman's new chief financial officer, Ian Lowitt, said on the conference call that the first two weeks of June have been strong for Lehman.

Lowitt took the CFO post last week, succeeding Erin Callan, who is returning to investment banking, while Herbert "Bart" McDade, head of equities, became chief operating officer and president, succeeding Joseph Gregory, a longtime Fuld lieutenant.

"Joe's been my partner for over 30 years and I must tell you, it was one of the most difficult decisions that he and I had to make together," Fuld said.

Lehman does not plan to change its ratio of assets to common equity, but it may still reduce its proportion of mortgage assets.

The company's net revenue, affected by the write-downs, was negative $668 million in the latest quarter, compared with revenue of $5.5 billion a year earlier.

Through Friday's close, Lehman shares had fallen 60 percent this year, compared with a 20 percent decline for the U.S. brokerage sector as measured by the Amex Securities Broker Dealer index.