Lehman weathers the storm

Brokerage quiets talk about its imminent collapse after reporting results that beat forecasts. Shares surge 46%.

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By David Ellis, CNNMoney.com staff writer

Rumors of Lehman Brothers' imminent meltdown appeared greatly overexaggerated Tuesday, after the company reported better-than-expected results.

NEW YORK (CNNMoney.com) -- Lehman Brothers' shares soared Tuesday after the firm reported quarterly results that topped Wall Street's forecasts. Just a day earlier, investors had wondered about the firm's ability to withstand the turmoil in financial markets.

To be sure, the brokerage's first-quarter figures were dismal. Profit and revenue fell sharply from last year and it took $1.8 billion in writedowns across its mortgage and loan portfolio.

But analysts had expected worse and investors were cheered by the results, which reiterated that it maintained a "strong liquidity position."

The result: Lehman (LEH, Fortune 500) stock rocketed 46% - the single biggest one-day bump since the firm started trading publicly in 1994.

Net income at the bank fell 57% to $489 million, or 81 cents a share, during the first quarter ended Feb. 29. The firm reported profit of $1.15 billion, or $1.96 a share, in the year-ago period.

Revenue fell 31% to $3.5 billion from $5.05 billion last year.

Lehman was expected to post a decline in profit to 72 cents a share on revenue of $3.35 billion, according to earnings tracker Thomson Financial.

"Our results reflect the impact of a difficult market environment," said Lehman's Chief Financial Officer Erin Callan.

'Liquidity is front and center'

During a lengthy conference call with analysts, Callan countered overwhelming speculation about the underlying health of Lehman.

Shares of the New York City brokerage plummeted 31% in the previous two trading days amid fears about the company's balance sheet and its ability to raise capital. Investors worried that the company could suffer a similar fate to rival Bear Stearns (BSC, Fortune 500), which dramatically collapsed last week after suffering a liquidity crunch.

Lehman tried to discredit comparisons to its once-close rival, pointing out that its holding company had a liquidity pool of $34 billion and $64 billion in assets, in addition to $99 billion at its regulated entities.

"Liquidity is front and center, and here Lehman seems to be in survivable condition," Kathleen Shanley, senior analyst at Gimme Credit, an independent research service on corporate bonds, said in a note published Tuesday.

Callan noted, however, that the company had not yet accessed the Fed's new funding facility that was created amid the Bear Stearns fallout to provide cheap funding to broker dealers facing tight liquidity conditions, adding that the low rates made it "very attractive."

$1.8 billion mark down

The company also tried to present a more precise view of the value of its mortgage and leveraged loan portfolio by marking it down by $1.8 billion, with the lion's share of the reduction coming from its residential and commercial real estate businesses.

Suffering the biggest hit was Lehman's capital markets division, which saw its revenue cut in half as tough credit market conditions eroded the performance of its fixed-income business.

Helping to offset that weakness was the company's investment management business which saw its revenue jump 39%.

Lehman also surprised by reporting higher revenue related to mergers and equity originations, both of which have dried up on Wall Street as a result of the credit crisis, eliminating a key source of lucrative fees for investment banks.

Lehman and rival Goldman Sachs (GS, Fortune 500), which posted earnings well above Wall Street forecasts earlier Tuesday, were expected to report sizeable writedowns this quarter given the recent slowdown in the investment banking business.

Rough-going is not over

Callan, however, was careful to offer a tame outlook for the company, even though she believed the company was "well positioned."

"I am hard pressed to say we see the light at the end of the tunnel yet here," she said.

She also suggested that further job cuts would not be forthcoming at Lehman. During the quarter, Lehman has cut about 1,100 jobs.

"We will continue to monitor the size of our workforce versus opportunity," said Callan.

But when asked whether Lehman was looking to capitalize on the Bear Stearns fallout that shook the broader financial services sector, she said that was not a consideration for her firm.

"It's fair to say we have great sympathy for our colleagues at Bear Stearns," said Callan. "It's hard at the moment to focus on what the upside is for us."

Morgan Stanley (MS, Fortune 500) is set to deliver its quarterly results Thursday. To top of page

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