Lehman sees more subprime woes

NEW YORK (CNNMoney.com) -- Lehman Brothers said Wednesday that turmoil in the subprime mortgage business is likely to persist but that could open up some opportunities for the firm.

"[The subprime mortgage business in the U.S.] will continue to face headwinds in the near term," Lehman CFO Chris O'Meara told analysts during a conference call.

But Lehman is seeing the return of pricing power and "we expect to see various opportunities from the market dislocation," he said.

The exposure investment banks have to the subprime market has come into focus as some of the nation's largest subprime mortgage lenders have fallen to the brink of bankruptcy amid a sharp rise in defaults among borrowers.

Shares of Lehman (down $2.72 to $69.28, Charts) fell 4 percent in midday trading amid a broad market selloff triggered by ongoing troubles in the subprime mortgage market.

Wall Street firms have their hands in all segments of the subprime market, where lenders make home loans to borrowers with weak credit. Wall Street banks not only provide financing to mortgage lenders, but also buy these loans, repackage them and sell them as securities to big investors like mutual funds and hedge funds.

Analysts consider Lehman to be one of the Wall Street firms with the most exposure to these risky home loans.

Lehman is "not immune" to problems in the U.S. subprime sector, which hurt its "securitizing" business during the latest quarter, but it has actively hedged its positions to lower its overall risk, O'Meara said.

Revenue from the subprime mortgage business remains small, he also pointed out. Over the past six quarters, U.S. subprime mortgage origination, securitization and trading accounted for less than 3 percent of the company's revenue.

Additionally, Lehman's experience in the subprime sector could help it benefit from turmoil in the market, O'Meara said. Such opportunities could range from buying portfolios of assets to helping clients rearrange their portfolios and picking up talent, he said.

He also said that the subprime challenges appear to be fairly contained for now, echoing the view Goldman Sachs CFO David Viniar offered a day earlier.

Goldman Sachs, which is believed to have a smaller exposure to subprime compared to other Wall Street firms, said it is keeping an eye on prices, but downplayed the idea that it plans to delve deeper into subprime.

"We look at opportunities in all sectors if the price is right and if we think the point in the cycle is appropriate," a Goldman Sachs spokesman said Wednesday. "But we are not aggressively pursuing the subprime sector," he added.

So far, subprime woes don't appear to be hurting the bottom line for Wall Street banks.

Lehman posted record quarterly results on Wednesday. The investment brokerage said net income rose 6 percent to $1.15 billion, or $1.96 a share, for its fiscal first quarter ended Feb. 28. Revenue jumped 13 percent to $5 billion.

Goldman Sachs (Charts), which kicked off earnings season for Wall Street on Tuesday, also posted record quarterly results. Bear Stearns (Charts) is next on tap with earnings due on Thursday.

But economists worry problems in subprime will eventually spread to other parts of the mortgage market, creating a credit crunch that could slow the housing recovery and hurt the broader economy.

Wall Street firms could take a hit from such a fallout, not just because they have exposure to subprime loans but because their overall business would be impacted by a downturn in the economy.

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