Lehman CFO stimulates stock with upbeat liquidity comments

Erin Callan, lehman cfo, erin callan lehman, lehman brothers, lloyd blankfein, goldman sachs
Lehman Brothers Holdings (LEH:
Lehman Brothers Holdings Inc
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Last: 46.49+14.74+46.43%
4:01pm 03/18/2008
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LEH 46.49, +14.74, +46.4%) sees no quick end to the global economic slowdown or a thaw in the credit freeze but is well-positioned to tap capital to run its businesses, Chief Financial Officer Erin Callan said Tuesday.
She made her remarks to analysts after the fourth-largest securities firm said its fiscal first-quarter net income fell 57% from a year ago. However, its earnings of 81 cents a share beat analysts' expectations of 72 cents.
The results, coupled with Callan's remarks about Lehman's ability to access capital by relying less on short-term borrowing, sent Lehman's shares climbing. They traded recently up $11 to $44.90, or 35%.
That contrasts with a decline of more than 19% on Monday when markets feared that Lehman's large reservoir of poor mortgage and loan assets could face the same kind of liquidity squeeze that led to the forced sale of Bear Stearns Cos. (BSC), an investment banking rival.
Callan fortified analysts on a conference call by disclosing in detail the firm's strengths and weaknesses. Lehman wrote down $4.7 billion of impaired residential and commercial mortgages and leverage buyout loans - reduced to $1.8 billion after hedges - but its leverage ratio that shows its vulnerability to debt has declined in the past three months and its portfolio of mortgage and loan assets is on the decline, she said.
She also said Lehman has not lost access on a net basis to raising money on a short-term basis from investors and other financial firms that provide repurchase loans - or cash in return for securities Lehman puts up at collateral. It was loss of repo lending that helped bring Bear Stearns' collapse.
Callan was also realistic about the outlook for the company's core businesses, but laid out opportunities.
Equities markets remain weak because of "ongoing concerns" about consumer loan losses and further declines in housing, she said, but volatility and volumes in stock trading have been providing "fantastic" opportunity for the firm's business model of trading and selling risk-mitigation strategies to customers.
Fixed-income capital markets continue to face uncertainty, she said, but trading in areas such as interest-rate swaps and foreign exchange trading remain robust, she said.
Lehman, which five years ago was largely focused on selling and trading bonds to U.S. investors, continued its product and geographical expansion. In the first quarter, 62% of its revenue, or $2.2 billion, came from outside the United States.
Callan, who in December expressed optimism that cash-rich investors would start buying some of the leveraged buyout loans and mortgages gumming up banks' balance sheets, said she has become more realistic about predicting when the current credit freeze will end.
She was tempted to say that fixed-income buyers can't stay on the sidelines forever but "we said that last quarter and it doesn't seem to have changed," Callan said.
Lehman laid off another 1,100 employees in March, after about 2,000 in the previous 12 months, but raised the amount of revenue it is devoting to compensation to ensure that it retains strong employees and attracts new talent.
She said the company will continue to monitor headcount against business opportunities, but noted that she sees no imminent burst of business.
"I am hard-pressed to see the light at the end of the tunnel here," she said about illiquid assets and the economy in general.
Lehman economists predict weak growth in the U.S. economy of just 2-3% in both 2008 and 2009, she said.