Lehman Investors Get Reassurance

By Greg Farrell

NEW YORK — Lehman Bros. CEO Richard Fuld seemed to reassure shareholders about the investment bank’s future Monday after he took responsibility for its $2.8 billion loss in the second quarter and added his belief that the firm can continue to “go it alone.”

Lehman shares closed at $27.20, up 5.4%, after a conference call with analysts to discuss the company’s first quarterly loss since going public in 1994.

Last week’s pre-announcement of the loss in the quarter ended May31 led some investors to question whether Lehman could survive as an independent entity. But Fuld’s efforts to contain the damage mean that “They’re not going to be acquired,” says Richard Bove of Ladenburg Thalmann. “There’s no reason for them to give up their independence.”

Lehman reported that revenue in the second quarter was negative $668 million — compared with $5.5billion in the same period last year. The unusual negative number for revenue reflected the company’s trading losses.

The $2.8 billion net loss contrasted with a $1.3 billion profit last year.

Fuld last week removed two top members of his management team: CFO Erin Callan and COO Joseph Gregory. Fuld told analysts, though, that he wouldn’t pass the buck for Lehman’s dismal second-quarter performance.

“I am very disappointed with these financial results,” he said. “We lost $2.8 billion. That’s just totally unacceptable. This is my responsibility.”

Investors have watched Lehman closely since Bear Stearns collapsed in March. Bear fell after its trading partners began to fear that it didn’t have enough liquidity to withstand the economic downturn.

Like Bear, Lehman was highly leveraged, its balance sheet weighed down with mortgage-related assets that have declined in value.

When Bear Stearns ran out of capital, the investment bank was forced into a bargain-basement sale to JPMorgan Chase at $2 a share, a price that was eventually raised to $10 a share.

But unlike Bear, Lehman has access to the Federal Reserve’s discount window.

In addition, Lehman moved aggressively in the second quarter to shed its mortgage-related assets. The firm reported it had sold $147 billion worth of assets in the second quarter, putting it in a stronger position than Bear Stearns was in during its final months.

Fuld says that Lehman’s “core business and our strategy are sound. … I believe in the model.”

Several analysts agree.

“They’re big enough to be independent,” says Jeff Harte of Sandler O’Neill. “That’s not to say that if the right opportunity came along, they wouldn’t take it.”

Brad Hintz of Sanford Bernstein, who used to work for Fuld at Lehman, says, “It would take a very callous board of directors to forget what he has achieved at the firm and force Dick out.”

Fuld has headed Lehman since it was spun off from American Express in 1994 and turned what was considered a weak player into a financial powerhouse. (c) Copyright 2008 USA TODAY, a division of Gannett Co. Inc.