Lehman CEO says worst is over, yet troubles ahead

NEW YORK Wed Apr 16, 2008 8:03am BST

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NEW YORK (Reuters) - Lehman Brothers Holdings Inc LEH.N Chief Executive Dick Fuld on Tuesday became the third investment bank head to strike an optimistic note about financial markets this month, saying "the worst is behind us."

Speaking at the Wall Street investment bank's annual meeting, Fuld said the U.S. economy will take "a number of quarters to regain its previous strength," but that client trading activity and investor sentiment offer reasons to be optimistic.

Fuld's remarks followed similar statements by Goldman Sachs Group Inc (GS.N) Chief Executive Lloyd Blankfein and Morgan Stanley CEO John Mack last week in which both said global markets are showing signs of working through their difficulties.

U.S. equity investors seem to be listening -- the Standard & Poor's 500 index has risen more than 4 percent since mid-March.

Financial markets typically rebound ahead of actual economic recoveries, but despite their optimism, investment bank chief executives have in recent weeks been reluctant to call a market bottom.

"Maybe we're at the end of the third quarter, beginning of the fourth quarter," Blankfein said last week. "If you watch sports, sometimes there's a lot of timeouts in the fourth quarter. It takes longer to play than any of the other quarters, and sometimes it ends in a tie and goes into overtime."

Mack, also using a sports analogy, said the subprime mortgage crisis was in the "bottom of the eighth inning or top of the ninth."

DIFFICULTIES

Investment banks still face difficulties. Regulators will likely force dealers to boost their capital levels and reduce their assets relative to their borrowings, a big theme last weekend at the G7 meeting in Washington, D.C.

Lehman is planning to both raise equity and reduce assets as it looks to deleverage, Fuld said on Tuesday. The investment bank sold $4 billion of convertible preferred shares at the beginning of the month, proving it can raise capital.

That was crucial for Lehman, which some investors feared could face a bank run similar to the one that forced Bear Stearns Cos BSC.N to sell itself to JPMorgan Chase & Co (JPM.N) at a rock-bottom price.

Many investors are less concerned about investment banks' stability now, though, after the Federal Reserve said the banks can borrow directly from the central bank.

Lehman has accessed overnight Fed financing several times, and plans to do so again on Wednesday. It does not have any borrowings outstanding as of Tuesday, Fuld said.

Speaking after the annual meeting, Chief Financial Officer Erin Callan said the investment bank has found that securities that can be pledged to the Federal Reserve can also be borrowed against in short-term markets known as repo markets.

Lehman has been using various securities as collateral for borrowing at the Fed, most notably loans packaged into bonds last week. When the Fed accepts the assets, Lehman then knows it can borrow against the assets in repo markets, Callan said.

Last week, Lehman packaged $2.8 billion of unsold loans into bonds, about $2.26 billion of which were investment-grade. The bank then used some of the investment-grade bonds as collateral in borrowing from the Fed.

Separately, Lehman Brothers said shareholders approved the company's directors for a year term. All Lehman directors are elected annually.

(Additional reporting by Joseph A. Giannone; Editing by Brian Moss and Jeffrey Benkoe)

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