Lehman Hitting on All Cylinders

Lehman Brothers (LEH-NYSE) earnings report yesterday did not disappoint. There is a feeding frenzy on Wall Street and Dick Fuld has staked out a seat at the table. It is hard to believe they almost went out of business nearly a decade ago due to a nasty case of Asian contagion, Russian defaults and the near Coup de Grace delivered by the good folks at Long Term Capital Management.

Lehman overcame the recent sub-prime fiasco by leaning on the other legs of the stool supporting the shop. Investment management revenue rose 30% y-t-y, debt and equity origination rose 87% and 60%, respectively. Taking management comments at face value, you can assume the sub-prime meltdown was a mere speed bump that should provide for easy comparisons in its fixed-income operations a year from now.

The health of their equities business is most impressive. And look for M&A activity, most likely outside of the U.S., to add to their equity and asset management segments in the future.  Lehman is no longer a bond shop.

Fixed-income sales and trading, including bonds, currencies and credit derivatives, and debt-underwriting fees accounted for 44 percent of Lehman’s revenue in the second quarter, the smallest share since 2000. Only four years ago, that figure was 62 percent.

Lehman has become the largest broker of shares on the London Stock Exchange and third-biggest on U.S. bourses. Its team of U.S. equity-research analysts has ranked first in Institutional Investor magazine’s annual survey for four years. In 2003, Fuld made Lehman a bigger player in money management with the $3.2 billion purchase of Neuberger Berman Inc.

The Lehman Brothers of the 80’s and 90’s was a political snakepit. Dozens of big swingers left the internal bickering behind and later founded or strengthened firms such as Blackstone Group, Furman Selz and Evercore Partners. It was a brain drain.

Lehman is now is a well-oiled machine. It has to be in order to keep up with its fleet footed rivals. It would seem a word that was once out of favor on the Street is back with a vengeance:

Teamwork

``Fuld has managed to coalesce a band of bankers, analysts, traders and others to pull on the same oar,’’ said Bruce Foerster, who ran equity syndication at Lehman for two years before the firm’s spinoff from American Express Co. in 1994. ``He’s done that beyond anyone’s wildest expectations.’’

It is hard to believe Lehman almost went under in 1998, forcing Dick Fuld to knock on doors in an attempt to stave off bankruptcy. Then he set about growing the shop. Earlier this decade Lehman was busy hiring while many firms jettisoned staff.

Headcount has grown 9% this year and they are looking for more bodies as we speak.

Lehman employees might occasionally grouse about working there, particularly if they have a tyrannical boss. But they might want to give thanks instead.

Thanks that they did not work for the crew running Prudential Financial.

Lehman’s “Gazillions” in Profit Show firm No Longer a Bond Shop
Bloomberg
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