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CORRECT: Lehman Is Not Cutting Dividend, Already Raised $6B

Last Update: 6/16/2008 4:32:27 PM

(Adds conference call comments from CEO Fuld and other executives beginning in
the first paragraph and updates stock price.)

By Jed Horowitz
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–Lehman Brothers Holdings Inc.(LEH) announced a $2.8 billion
second-quarter loss Monday that matched its forecast a week ago, but the company
disclosed more details about its quickened rounds of raising capital, management
changes, asset sales and markdowns to quiet skeptics concerned about its future
and plummeting share price.

“While we acknowledge our second-quarter results as unacceptable,” newly
appointed Lehman President Herbert ‘Bart’ McDade said, “We did make substantial
improvements in our liquidity profile, capital base and cost base.”

McDade spoke alongside Lehman Chairman and Chief Executive Richard Fuld Jr. and
new Chief Financial Officer Ian Lowitt in a nearly two-hour conference call with
analysts to address the company’s perceived vulnerabilities. McDade, 48, and
Lowitt, 44, are both Lehman veterans who were appointed to their new posts
Thursday.

Fuld was direct when asked if Lehman could survive independently under a likely
new federal regulatory framework that will require stronger capital and less risk
for investment banks after the collapse of Bear Stearns Cos.

“We can go it alone,” said Fuld, 62, the longest-serving head of a major Wall
Street bank. “What has been created for shareholders in the past can be created
again.”

He reiterated that as a public company Lehman would be obliged to consider other
ownership models if a reasonable from a large commercial bank or other party
occurred. Analysts have been speculating about a possible takeover but say
nothing is likely for at least several quarters until the worldwide credit
financing crisis settles down.

For the quarter ended May 31, the smallest of the big four U.S. investment banks
said it lost $5.l4 a share, compared with prior-year net income of $1.27 billion,
or $2.21 a share.

It had no revenue during the quarter because of write-downs and investment
losses. Its negative revenue of $668 million compared with year-earlier net
revenue of $5.51 billion.

Addressing investors’ and rating agencies concerns about the high level of debt
it has assumed, Lehman said its leverage ratio - reflecting how much equity it
has to support its $337.7 billion of dollars of assets - fell during the quarter
to 24.3 from 31.7 three months earlier. A week ago, Lehman predicted the newly
scrutinized ratio - which denotes more risk the higher it gets - would slide to
25.

Investors have been concerned investment banks will become far less profitable
than in the past as they sell risky assets at steep discounts and raise expensive
equity. Lehman and rivals Goldman Sachs Group (GS), Morgan Stanley (MS) and
Merrill Lynch (MER) have boasted returns of equity of 20% and higher in most
years, but the new reluctance to use debt has created concern that ROEs will fall
to single-digit levels.

Lowitt on Monday insisted Lehman can generate returns in the mid-teens even in
the current difficult environment. He and others have been saying that investment
banks will be able generate higher returns on assets than in the past - charging
more for loans, for example - because credit has become expensive.

Lehman executives also tried to dispel concerns the company’s still-hefty
holdings of mortgages and other risky securities are properly valued and that its
exposure to continuing weak areas such as monoline insurers and real-estate
developers is relatively moderate. Even after selling and writing down $24
billion of the assets in the quarter ending May 31, Lehman had $60.8 billion of
commercial and residential mortgages and asset-backed securities and $18 billion
of leveraged-buyout loans.

Deutsche Bank analyst Michael Mayo challenged the executives on Lehman’s
valuation of its own portfolios. “Other top executives have said (their
valuations) are fine, and then had big writedowns,” he said on the call,
implicitly referring to former Merrill Lynch CEO Stanley O’Neal and perhaps to
Lehman’s own former chief financial officer. “What is the likelihood of that
happening?”

“I certainly can’t speak for other companies,” Fuld said, but “my intention at
the close of each quarter is to make sure that we are marked appropriately.”
Pushed on whether he remains comfortable with the valuations two weeks into the
fiscal third quarter, Fuld, known for his intense focus and terse responses,
said: “Yes I am.”

He and his new lieutenants also insisted Lehman - after raising $6 billion of new
equity last week and $9.5 billion of convertible stock and long-term debt since
March - is well capitalized and has a surfeit of liquid assets to support its
businesses. Bear Stearns was forced with government urging into the arms of
JPMorgan Chase (JPM) after trading counterparties, banks and clients fled out of
fear that it couldn’t finance its operations.

Lowitt said no regulators pushed Lehman to raise capital and he and McDade said
the company has experienced no “significant” pullback by clients or trading
counterparties.

Lehman is as strongly capitalized, with about $26 billion of stockholders equity,
as any of its peers, he said, noting the total is up around 6% from the previous
quarter. He also said new calculations of regulatory capital from international
banking regulators will show that its risk-based Tier 1 capital will be “well in
excess” of strongly capitalized levels when it reports them later this summer.

The company’s portfolio of illiquid assets, private equity and real estate that
are hard to value also is slowly diminishing, he said, and Lehman has no need to
raise more long-term debt. Its liquidity pool stands at $45 billion, he added, up
32% from the prior quarter.

However, concerns about the weak economy’s effect on core investment banking,
trading and asset management businesses continue, and Lehman also surprisingly
said Monday that it had more European real estate losses than expected. The New
York-based company has been expanding its activities outside the United States in
an attempt to diversity.

Lehman’s results deteriorated across all its divisions. Its capital-markets
business posted negative net revenue of $2.4 billion as revenue from fixed-income
activities - ground zero for the company’s continuing write-downs of mortgages
and related assets - fell to negative $3 billion.

The losses, which included those on positions meant to hedge Lehman’s exposure to
risky credits, contributed to negative net revenue of $700 million in the
quarter, despite some liability gains on the shrinking value of Lehman’s own debt
owed to investors. Asked during the call by Oppenheimer analyst Meredith Whitney
how long it will take for the company’s benchmark fixed-income franchise to
regain its profitability Lowitt said it’s impossible to offer a timetable.

“The markets continue to be challenging,” he said. “We’re very confident that we
can get there but I can’t promise you a specific time of when.”

Equities revenue in capital markets dropped 65% from a year earlier and 57% from
the fiscal first quarter to $600 million. The drop included $300 million in
losses on private equity and investments in which the bank was a principal.

Investment-banking revenue - from underwriting stocks and bonds for companies and
advising them on mergers, acquisitions and divestitures - slumped 25% from a year
earlier. Investment-management revenue was flat at $800 million, worse than the
company’s projection last week for a 13% rise to $900 million.

Lehman has been battling perceptions that its business mix and size made it
similar to Bear Stearns Cos., which spiraled to near-collapse in mid-March before
the federal government pushed it into the arms of JPMorgan Chase & Co. (JPM).
Although rivals such as Goldman Sachs and Morgan Stanley - which report their
fiscal second quarters this week - also have been hurt by the credit crisis,
Lehman holds more residential and commercial real estate, loans and securities
than any other firms relative to its balance sheet. Merrill Lynch, which reports
its results next month, is the most exposed to collateralized mortgage
obligations.

Fuld last week tossed aside longtime colleague Joseph Gregory as his president
and Erin Callan, a lawyer and investment banker who had been CFO since December.
Both are remaining with Lehman in undefined positions.

“Clearly investors had lost confidence in some of the senior management so a
change certainly was necessary,” said James Ellman, president of Seacliff Capital
in San Francisco, who does not own Lehman stock and manages $200 million of
assets. “The real question is whether they are really changing the direction of
the ship or just rearranging the deck chairs.”

“I think the write-downs and the pain on Wall Street are close to an end,” said
Ellman, who is worried more about how the credit contraction on Wall Street is
only now migrating to the consumer economy and to commercial bank portfolios.
“Wall Street moves faster, but if the markdowns continue in the fixed-income
market at the same pace, then Lehman is not out of the woods.”

He said investors are watching closely to see if institutional investors are
ready to start buying at the liquidation prices marked on Lehman’s balance sheet,
implying that write-downs will move at a slower pace in coming quarters.

-By Jed Horowitz, Dow Jones Newswires; 201-938-4047; jed.horowitz@dowjones.com

(Donna Kardos contributed to this report.)

Lehman Brothers Holdings (LEH) does not plan to cut its dividend. Also, it raised
$6 billion of additional equity last week.

(Items at 10:24 a.m. and 2:29 p.m. EDT incorrectly said the company planned to
cut its dividend in half and raise $6 billion in capital.)

(END) Dow Jones Newswires

June 16, 2008 16:32 ET (20:32 GMT)

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