Lehman to Cut 5% of Global Workforce as Economy Slows

Lehman Brothers Holdings Inc., the largest underwriter of mortgage-backed bonds, is eliminating 5 percent of its workforce as credit markets remain frozen and the U.S. economy slows, a person briefed on the plan said.

The cuts will affect all divisions and regions, according to the person, who declined to be identified because the New York-based firm hasn't announced the reductions. Based on Lehman's employee count at the end of November, about 1,400 jobs will be lost.

Chief Executive Officer Richard Fuld already eliminated almost 3,900 positions, mostly in units that made home loans, following the collapse of the U.S. subprime mortgage market last year. The bank, which closed its subprime unit and reported record earnings for 2007, awarded Fuld $40 million in annual pay. He now faces a credit-market contraction that may have pushed the U.S. economy into a recession, prompting the Federal Reserve to add as much as $200 billion to the banking system over the next month.

Job cuts are expected everywhere, said Roger Lister, the New York-based chief credit officer for financial institutions at DBRS. I wouldn't interpret it as a sign of weakness for Lehman or any other firm.

Hannah Burns, a Lehman spokeswoman, declined to comment on the latest round of firings. The company fell $3.38, or 7.3 percent, to $42.98 in New York Stock Exchange composite trading. The 12-member Amex Securities Broker/Dealer Index sank 4.7 percent, led by the 11.1 percent drop at Bear Stearns Cos.

Higher Expenses

Oppenheimer & Co.'s Meredith Whitney, who correctly predicted Citigroup Inc. would reduce its dividend, cut her 2008 and 2009 earnings estimates for Lehman. The job cuts will push expenses higher because of restructuring charges, Whitney wrote in a note.

Whitney reduced her fiscal 2008 estimate by 17 percent to $4.75 a share and lowered her 2009 estimate by 16 percent to $6.70. The New York-based analyst also cut her revenue forecasts for the company, which she still rates at outperform.

Credit-default swaps on Lehman rose 63 basis points to 398, according to Phoenix Partners Group. The swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A decline indicates improvement in the perception of credit quality; an increase, the opposite.

30,000 Jobs

Wall Street firms have eliminated more than 30,000 employees in the last seven months as the U.S. housing market contracted and the price of mortgage-related assets declined.

Banks and brokers have written down more than $188 billion of subprime-related assets since the beginning of 2007, according to data compiled by Bloomberg. Lehman has reported $1.5 billion of charges while larger rival Morgan Stanley has taken $9.4 billion of writedowns. Merrill Lynch & Co., the world's biggest brokerage, has posted $24.5 billion of writedowns.

William Tanona, an analyst at Goldman Sachs Group Inc. in New York, predicts Lehman's first-quarter writedowns will reach $3.5 billion.

The banks are starting the process of trimming to the bone, said Zaheer Ebrahim, executive director of London-based recruiting firm Kennedy Associates. This may go on for a while.

The Federal Reserve said last week that it increased the amount of funds to be auctioned to banks this month to $100 billion from $60 billion. The Fed also said in a March 7 statement in Washington that it would make $100 billion available through weekly 28-day repurchase agreements, where the central bank will lend cash in return for assets including mortgage-backed bonds.

Fed officials said at the time that the announcement was an effort to address the deterioration in credit markets.