Lehman Takes $700m Hit From Credit Crunch, But Shares Edge Up

The Wall Street investment bank Lehman Brothers has revealed that the global credit crunch knocked $700m (£350m) off its revenue over the summer as mortgage-backed securities plummeted in value.

Lehman blamed an "extremely difficult environment" in global financial markets for a 3% drop in its third-quarter profits to $3bn, although its shares edged upwards because the damage was not as bad as analysts had expected.

"I think the worst of this credit correction is behind us," said chief financial officer Chris O'Meara.

Lehman executives said "valid concerns regarding the underlying credit quality of sub-prime mortgages" had become "systemic", challenging liquidity in the debt market. "As risk aversion increased, investors hoarded liquidity," they said.

Lehman cut 1,200 jobs last month by shutting a home-lending business which packaged sub-prime mortgages. Its earnings yesterday kicked off a crucial week on Wall Street as a string of banks, including Goldman Sachs, Bear Stearns and Morgan Stanley, disclose the impact of the crisis on their finances.

Much of the effect on Lehman fell on the bank's capital markets division, which saw its revenue drop by 14% to $2.4bn. The bank reported "very substantial valuation reductions" on leveraged loans and residential mortgage-related positions which, after taking into account gains on economic hedges, cut income by $700m.

Lehman's operations in the foreign exchange and equity markets suffered a knock-on effect as volatility swept through the financial system. But advisory fees rose from $195m to $425m as Lehman continued to benefit from a glut of private equity deals.

During early trading in New York, shares in Lehman rose 3% to $60.43. David East hope, an analyst at Boston-based consultancy Celent, said: "Lehman's third-quarter results show the remarkable capabilities of the investment banks to weather market storms."

He said strength in equities, derivatives and investment management had offset the damage to the bank's fixed-income business. But he warned that uncertainty persisted. "It will become clear over the next several months in which direction the credit crunch will go. But suffice it to say the 'Goldilocks' conditions at the investment banks are over, which Lehman has now demonstrated," he said.

Revenue at Lehman's European operation, which is based in London, rose by 29% year on year to $1.5bn, although it was 18% lower than the figure for the preceding quarter.

Lehman said it expected to reduce its workforce further during the final quarter of the year, and to hire again in 2008.