Lehman Brothers profit up on stock trading, buyouts

NEW YORK — Lehman Brothers Holdings Inc., the nation's fourth-largest investment bank, said Tuesday robust stock trading and buyout business pushed second-quarter profit up 27 percent, in what may be a harbinger for other brokerage earnings due this week.

Gains from stock trading amid a record run on Wall Street, as well as fees charged to companies for advice on takeover deals, helped drive Lehman's business during the quarter. This tempered a slump in its fixed-income business, particularly from the sagging performance of mortgage-back securities hurt by a squeeze in subprime loans.

This bodes well for other Wall Street firms — Goldman Sachs Group Inc. and Bear Stearns Cos. post results on Thursday. They are expected to show that sharp international growth, trading and investment banking offset any weak areas — a key as financial institutions face the possibility that interest rates will not fall this year.

"This is the beauty of having a diversified business mode," Lehman Chief Financial Officer Chris O'Meara said in an interview. "We're in a strong market environment with interest rates low, equity valuations staying strong, and activity levels continue in trading. We're optimistic."

Wall Street expected the Federal Reserve to lower interest rates this year before economic data began to suggest the economy is expanding. Lower rates spur corporate borrowing, which includes bond issuance and loans.

For the three months ended May 31, profit after paying preferred dividends rose to $1.26 billion, or $2.21 per share, from $986 million, or $1.69 per share, a year earlier.

Revenue rose 25 percent to $5.51 billion — half of that coming from overseas.

Results topped Wall Street projections for earnings of $1.88 per share on revenue of $4.97 billion, according to analysts surveyed by Thomson Financial.

Chairman and Chief Executive Richard Fuld, who has led Lehman since it was spun off from American Express in 1994, has transformed the company into one of Wall Street's biggest investment banks. While Lehman's bond business has traditionally been its biggest revenue stream, Fuld has steered the bank into more profitable businesses globally, such as advising on mergers and acquisitions.

Diversifying the firm has allowed Lehman to remain profitable even as some of its key businesses lag. For example, this year the company has been able to compensate for weakness in its mortgage banking business related to subprime loans.

"Lehman kicked off the investment bank reporting season with exceptional results driven across almost all businesses with the exception of fixed income trading," said Goldman Sachs analyst William Tanona. "We expect the other brokers to rally alongside these results."

Equity trading drove Lehman's capital markets business to $3.6 billion from $3.1 billion year-over-year, a gain of 17 percent. However, the fixed income segment of that business — which includes bonds, derivatives and credit products — fell 14 percent to $1.9 billion from $2.2 billion a year ago because of "continued weakness in the U.S. residential mortgage business."

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