Wednesday, February 6, 2008

Lehman Brothers - Strategy

June 2007

Second quarter results

Net income at Lehman Brothers was $1.3 billion in the second quarter, or $2.21, beating analysts' estimates by 33¢. Earnings per share were 31% higher than the same quarter last year.

Much of that money came from abroad, at 48% overseas revenue. With the U.S. barely growing at all last quarter, Lehman is profiting from faster-growing economies in Europe, Asia, and elsewhere. Mergers-and-acquisitions activity helped profits, as did equities trading as stock markets hit records worldwide, including in the U.S. The firm says it's meeting goals to diversify its revenue. "Our global platform is stronger and more balanced than ever," Chairman and Chief Executive Richard S. Fuld Jr. said in a statement.

The booming international business helped hide a slowdown in U.S. revenues. Lehman Brothers has a big focus on fixed-income business in the U.S., where it's been hurt by the slowdown in housing. Fixed-income sales and trading revenues fell 14% from a year ago.

February 2007

Lehman Brothers, the investment bank once known for its bond trading , is grabbing share in mergers advice and rapidly expanding its global reach.

It’s hiring more bankers to gather strength for a deal offensive. The strategy is working. Lehman is a co-investor in the largest buyout ever, the bid for TXU, and was an underwriter for the first IPO of a hedge fund, Fortress Investment Group. Now CEO Richard Fuld wants to keep ramping up Lehman’s investment management business, buying stakes in hedge funds like D.E. Shaw. He’s also sharpening the firm’s investment banking prowess overseas.

The new House of Lehman is also taking advantage of the huge demand for fixed-income securities from companies and traders, rolling out everything from securitized Japanese residential mortgages to student loans while beefing up its stable of bonds.

The sale of Lehman Brothers Kuhn Loeb to Shearson American Express in 1984 led to the integration of the Lehman Brothers' scrappy fixed-income trading personnel with the more relaxed fixed-income specialists from Shearson. To put it politely, there was a revolt at the thought of the Lehman Brothers traders reporting into Shearson American Express fixed-income management, and hence for several years, the Shearson Lehman Brothers fixed-income division was in essence divided into two parts. An entity run by Dick Fuld called Lehman Commercial Paper Inc. ("LCPI") controlled the repo desk portion of central funding, the entire and very significant commercial paper operations, the government bond trading and sales operation and the relatively small group that was called the mortgage department. The rest of fixed-income reported into management from the former Shearson entity.

The mantra of the old Lehman Commercial Paper Inc. ("LCPI") division was "Every day is a battle: think about the firm, do the right thing, protect your client, protect the firm, be a good team member and most importantly, Be in the Game, BE IN IT."

The old LCPI culture was incredibly strong and now apparently permeates much of the other segments of the firm, both in the New York City headquarters and in the branch offices around the world. Congratulations to Dick Fuld, Joe Gregory (Lehman's President) and the rest of the Lehman Brothers management team on transforming a very successful bond operation into a truly global firm.

Why Lehman Brothers escaped relatively unscathed from this summer's credit crunch? Lehman Brothers truly has strong risk management and survived this round of stress so that it can play in the game of fixed-income another day.

At present, it appears that the true kings of the fixed-income world are Lehman Brothers and Goldman Sachs. It will be interesting to watch their moves as the mortgage market meltdown continues to evolve and the challenges of globalization, electronic trading, increased compliance, and illiquidity put further stresses on the global fixed-income (and FICC) divisions.

Source for the post:
October 2007

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