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CEO Fuld confident after Lehman cuts mortgage assets

Firm aims to stem credit market damage

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Bloomberg News / June 17, 2008

NEW YORK - Lehman Brothers Holdings Inc.'s chief executive, Richard Fuld, declared his confidence in the valuation of the firm's mortgage assets after slashing the holdings 20 percent in the second quarter to curb further damage from the credit market collapse.

Lehman rose in New York trading after Fuld, in his first public appearance since April, said the company had fairly gauged the market value of the assets, as his finance chief laid out more details on the stakes than previously disclosed.

Lehman, the fourth-largest US securities firm, yesterday reaffirmed that it lost $2.8 billion in the quarter.

Hedge fund manager David Einhorn has questioned whether Lehman fully marked down assets hit by the collapse of the subprime home loan business. Almost 60 percent of Lehman's market value evaporated on the New York Stock Exchange this year amid speculation that the firm faced undisclosed mortgage losses. Fuld, who replaced two top lieutenants and raised $6 billion of capital last week, sought to reassure investors yesterday about the company's prospects.

"Our core business and our strategy are sound," even after the firm's mortgage business shrank, Fuld said on a conference call with investors. "With this franchise's strength and power, we can go it alone. I believe in the model."

Lehman shed $147 billion of assets during the quarter, more than the $130 billion it estimated last week and more than the company had targeted, Fuld said on the call. Net assets declined by $70 billion. Leveraged buyout loans were cut 37 percent to $18 billion.

"Versus what they've done in the past, this is superb," Dick Bove, an analyst with New York-based Ladenburg Thalmann & Co., said in a Bloomberg Television interview, referring to the firm's disclosures.

Lehman rose $1.39 to $27.20 in New York Stock Exchange trading. The shares have gained almost 20 percent in the past two trading days, helping to repair the stock's 38 percent decline this month through June 12.

Lehman's second-quarter loss of $2.8 billion, or $5.14 per share, was in line with preliminary figures the company released last week, the New York firm said yesterday in a statement. The results mark the first time since Lehman was spun off from American Express Co. in 1994 that Fuld has failed to deliver a quarterly profit.

The AAA-rated bonds backed by Alt-A mortgages were priced at about 70 cents on the dollar, chief financial officer Ian Lowitt said during a conference call discussing the results. Alt-A loans are made to borrowers who wanted atypical terms such as proof-of-income waivers while their credit scores are better than subprime lenders.

European mortgages are valued based on the assumption of a 28 percent housing price decline while prices are down about 7 percent in the continent, Lowitt said. The assets are priced at about 80 percent of their face value currently, he said.

Fuld, the longest-serving chief executive on Wall Street, is trying to convince investors Lehman can weather the credit contraction. His optimistic comments yesterday echoed similar remarks from Martin Sullivan, the former chief executive of American International Group Inc., after the insurer posted a $7.8 billion first-quarter loss.

Lehman repeated yesterday that it can maintain a competitive return on equity, even after reducing leverage, by increasing the prices it charges clients.


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