Lehman On Our Minds Earnings Hit Is Light. Is It Too Light?

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Shares in Lehman Brothers are trading up this morning after the firm said its third-quarter earnings dropped only a wee bit from a year ago. The subprime lending crisis has hit its fixed-income business, which was down nearly 50%, but its equities trading, asset management and investment banking businesses were strong. The total price tag of the credit crunch last quarter came in at $700 million in lost revenues.
The bottom line numbers look very good, at least compared to what many expected. Net profit fell 3% to $887 million ($1.54/share) from $916 million ($1.57/share) a year ago. Revenue rose to $4.31 billion from $4.18 billion. Wall Street analysts had predicted Lehman would file $1.47/share on $4.23 billion in revenue, which means that Lehman performed better than expected. "Better than expected" are magic words for investors, and Lehman immediately jumped in futures.
The bulls are now running. And we hate to ruin the china shop party, but it looks to us like some financial engineering and unsustainable growth went into those numbers. We can't really make heads or tails of the tax accounting, for starters. But when we looked between the pre-tax and post-tax numbers, tt looks like they are recording something like $70 million in tax savings from second-quarter to third-quarter, which might be due to writing down the valuation of leveraged loan commitments and mortgage positions. Did someone call the guys in the tax department and ask them to find a way to tack an extra dime onto earnings per share?
How about those additional revenues from investment banking? If you think that's sustainable, you might want to come take a walk with me to lower Manhattan. I've got a bridge to Brooklyn Heights I'm looking to unload.
More importantly, Lehman says it recorded "substantial valuation reductions" on some fixed income assets but we're basically supposed to trust that they've marked these things correctly. Because, you know, Wall Street banks have done such a great job at valuing fixed income assets recently. Why would anyone get suspicious of their valuation models now? To put it differently, many expected that the credit crunch would cost Lehman more than $700 million. We're still not confident it hasn't.
We know that we're fighting the numbers here. Sorry for being so churlish. We were up till 4 am with insomnia last night. Which always makes us feel bitter. If you're going to be up to 4 am on a Monday night it should involve whiskey, women and at least a little bit of crime.
So we'll let Dick Fuld have the last word. He sounds like he had a better night's sleep than we did.
“Despite challenging conditions in the markets, our results once again demonstrate the diversity and financial strength of the Lehman Brothers franchise, as well as our ability to perform across cycles,” Lehman chairman Richard S. Fuld said in a statement.
Press Release [Lehman Brothers]

Lehman Beats Estimates, Limits Losses on Mortgages
[Bloomberg]
The hit is light at Lehman [FT Alphaville]

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