Wall Street Bonuses on or above target for 2007

Lehman Profits Fall, but Give Wall Street a Lift By JENNY ANDERSON Published: September 19, 2007 The markets breathed a sigh of relief yesterday as Lehman Brothers, the first major Wall Street bank to report third-quarter earnings, took a hit from the seized-up mortgage markets and turbulent credit conditions but still posted results that were stronger than expected. Investors had expected that... [more]

Lehman Profits Fall, but Give Wall Street a Lift By JENNY ANDERSON Published: September 19, 2007 The markets breathed a sigh of relief yesterday as Lehman Brothers, the first major Wall Street bank to report third-quarter earnings, took a hit from the seized-up mortgage markets and turbulent credit conditions but still posted results that were stronger than expected. Investors had expected that weakness in credit markets would weigh heavily on Lehman, which has traditionally relied heavily on fixed income - a grouping that includes everything from bonds, credit derivatives, commodities, currencies, interest rates and the issuance and packaging of home loans. Lehman is the No. 1 underwriter of mortgage-backed bonds, or bonds backed by pools of mortgages. Third-quarter profit fell 3 percent, to $887 million, or $1.54 a share, from $916 million, or $1.57 a year ago. It declined 30 percent from a strong second quarter. Write-downs in the mortgage market as well as loans to private equity firms that the bank has not been able to sell reduced revenue by $700 million. Analysts surveyed by Thomson Financial had forecast profit of $1.47 a share. "Lehman took its medicine and still had a decent quarter," said Mike Mayo, an analyst at Deutsche Bank. "The bad news is what was known and there wasn't anything to go with that." Mr. Mayo said the market had not appreciated the fact that many of the brokerage firms, including Lehman, are geographically diversified. Lehman said 53 percent of its revenue came from outside the United States. "It's not smooth sailing," Lehman's chief financial officer, Christopher O'Meara, said, "but the worst of this credit correction is behind us." Mr. O'Meara expected merger and acquisition volumes would end the year up 15 to 20 percent. Lehman's shares closed up $5.87 to $64.49, on a day the overall market rose 2.5 percent after the Federal Reserve cut the federal funds rate. A rival brokerage firm, Morgan Stanley, reports earnings today, while Goldman Sachs and Bear Stearns report tomorrow. Lehman's results seemed to bode well for thousands of employees who are trying to calibrate year-end bonuses. Those bonuses, which provide the bulk of a trader or banker's compensation, strongly influence everything from Manhattan real estate prices to global art values. Though bonus decisions are made in the fourth quarter, the bank accrues, or sets aside, a portion of revenue every quarter, so each period offers a critical data point. This quarter, Lehman set aside $2.1 billion, compared with $2.7 billion in the second quarter. For the nine months ended in August, Lehman has set aside $7.3 billion, 14 percent more than the $6.4 billion set aside in the 2006 period. Lehman had 28,783 employees at the end of the third quarter, 16 percent more than one year ago. But the outlook might not be as bright for mortgage-related traders. "I guess that means that the mortgage-backed traders won't be buying new Maseratis this year," an analyst with Sanford C. Bernstein, Brad Hintz, said. Lehman's results offered a few surprises. Revenue from mergers and acquisitions was a record $425 million - a surprise - while fixed-income capital markets revenue, not surprisingly, fell 47 percent from a year ago and 43 percent from the second quarter. The equities business was up from a year ago but down from the last quarter. Mr. O'Meara said that market volatility helped the equity derivatives business while hurting the cash stock trading business, which suffers when there is not a clear direction in the market. Investment management, a business Wall Street banks have focused on in recent years because it is thought to be more stable, had a 33 percent increase in revenue from the third quarter of 2006 and 4 percent from the second quarter. Many banks are expanding in asset management to offset their proprietary trading groups, where profits are notoriously unpredictable. The bank offered an unusual amount of clarity on its positions, in part because the lack of information has made Lehman among the worst performers among the brokerage stocks. Mr. O'Meara said that the bank had $44 billion in commitments - loans made to clients but not yet financed - at the end of the second quarter. Of those loans, $17 billion remain, with the firm having sold or canceled the rest. "The biggest deals have not gotten done but there are many deals, $500 million to $1 billion, that have gotten done," Mr. O'Meara said. The bank has made commitments of another $10 billion, but on better terms to investors. The $700 million hit in the quarter represented the difference between the value of the commitments made - bonds or loans - and the price at which they could be sold and write-downs on residential mortgage-related assets. On a call with analysts, Mr. O'Meara said the total hit from the loans was "well over $1 billion," which was offset by hedges. Analysts had been concerned about the deteriorating value of the loans and their arbitrary pricing in an environment where nothing is being bought and sold. [less]