Lehman's Future Still Cloudy After $2.8 Billion Loss

Investment bank Lehman Brothers Holdingsposted a quarterly loss of $2.8 billion Monday, matching its forecast, after recording massive trading and hedging losses.

Lehman Brothers
Bert van Dijk
Lehman Brothers

With the results coming in as expected, analysts focused on the potential for future write-downs at the fourth-largest U.S. investment bank, which still has more than $60 billion of mortgages, real estate assets and asset-backed securities on its books.

That amount is well in excess of the company's net worth as measured by shareholders' equity.

Lehman last week said it expected a quarterly loss, its first as a public company,and said it was raising $6 billion of fresh capital.

That announcement triggered a crisis of confidence in the company's management that brought Lehman shares down 20 percent for the week and spurred the demotion of Chief Financial Officer Erin Callan and Chief Operating Officer Joseph Gregory.

Lehman shares rose Monday morning, climbing as much as 68 cents, or 2.6 percent, to $26.49 in early trading. The cost of protecting its bonds against default barely budged.

"The market was really focused on what Lehman would deliver. They were spot-on in the estimates and their numbers," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, N.J.

The market is carefully watching how Lehman is recording its hard-to-value assets, to see if more write-downs are coming, Kenny said.

Lehman said it took $3.7 billion of write-downs during the quarter for assets including mortgage securities. Banks and other financial institutions globally have written down more than $400 billion of assets amid the credit crunch.

Although those write-downs have triggered big quarterly losses at rivals like Merrill Lynch , Lehman had until this quarter managed to avoid posting a net loss.

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.

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 being spun off from American Express in 1994.

The company's net revenue, affected by the write-downs, was negative $668 million, 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.

Lehman shares trade at less than 80 percent of their book value, or the net per share accounting value of the company.

Investment banks usually trade somewhere above their book value, and trading below that level signals that investors are bracing for more write-downs.