Lehman's Fuld Says `Worst Is Behind Us' in Crisis

Richard Fuld, chief executive officer of Lehman Brothers Holdings Inc., told shareholders the worst is behind us in the credit-market contraction that has cost the biggest banks and brokerages $245 billion so far.

Fuld, speaking at the annual shareholders meeting of his New York-based firm, said the current environment remains challenging.

The comments echo those of Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., who told shareholders at the firm's annual meeting last week that we're closer to the end than the beginning of the crisis. John Mack, Morgan Stanley's CEO, said last week that the credit-market contraction will probably last a couple of quarters longer.

Lehman's chief financial officer, Erin Callan, said in an interview on April 11 that the firm had faced a very, very tough month, in March. I don't see what the real catalyst for change would be over the next several months, she said. We've got to look out to 2009 for where we're going to change.

Lehman, the fourth-largest U.S. securities firm, said on April 9 it had to bail out five short-term debt funds last quarter that were crippled by frozen credit markets. The firm took $1.8 billion of assets from the funds onto its books at the time, and recorded a $300 million loss. Earlier this month Lehman raised $4 billion from a stock sale, seeking to quell concern the firm was low on capital.

Sending a Message

Fuld said at the meeting that the sale was intended to strengthen capital and send a message to investors. He said the firm will continue to reduce leverage by selling assets, and can counter market rumors with good performance.

March was difficult because the collapse of Bear Stearns Cos. in the middle of the month created a sense of fear and paralysis about the securities industry, Callan said.

Derivatives used to hedge cash securities also diverged widely from their usual levels, she said. Investors were using indexes of credit-default swaps, which typically rise when perceptions of company creditworthiness worsen, to hedge against losses on everything from stocks to collateralized debt obligations. The indexes started to drop in mid-March at a faster rate than underlying securities improved, leaving investors with losses.

The world's biggest banks have recorded $245 billion in asset writedowns and credit losses since the beginning of 2007. Lehman avoided the much bigger losses reported by rivals such as Merrill Lynch & Co., which posted $25.1 billion of writedowns in the second half of last year.

Lehman, down 40 percent this year on the New York Stock Exchange, declined 9 cents to $39.29 at 11:58 a.m.

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.