markets-hub.com

Lehman Brothers Holdings Inc. is slowly chipping away at its subprime mortgage exposure, Chief Financial Officer Erin Callan told investors during its first-quarter conference call Tuesday. But the brokerage firm won’t unload mortgage-related assets in a market that isn’t assessing them at their intrinsic value for the sake of improving its balance sheet. That could mean a mortgage-laden balance sheet for some time to come because, while Lehman has “the risk management discipline, the capital strengths, and certainly the liquidity to ride out the cycle,” Callan doesn’t expect “this extremely challenging period” is going to end in the near term.

But the company’s financial chief, in a calm and even tone, reassured investors that the company is doing fine. It has a strong liquidity position at $100 billion, plus an additional $99 billion at its regulated subsidiaries, both of which are unchanged since quarter-end.

Callan reported no issues with Lehman’s prime brokerage clients, noting that the company has “structured its liquidity framework for a decade to cover expected cash outflows for the next 12 months. And we do so without being able to raise new cash in the unsecured markets, or without having to sell assets that are outside our liquidity pool, comprised of cash equivalents.”

As Callan spoke, two peers gave Lehman their votes of confidence, erasing concerns that it might face liquidity problems like those which caused Bear Stearns’ demise.

Standard & Poor’s boosted its investment opinion to hold from sell after the call, saying Lehman’s comments “should assuage fears that it faces any type of liquidity crisis at this point.”

And Goldman Sachs, which hosted its own first-quarter conference call Tuesday, added Lehman to its Americas Buy List, saying liquidity fears “have been overestimated.” Goldman echoed Lehman’s view that the Federal Reserve’s liquidity plan will help ease many short-term cash problems and stabilize the financial markets.

Callan’s cool under fire and the upgrades fueled a rally in Lehman’s shares, which advanced 41% Friday to $44.84. They had fallen 19% Monday to $31.75 after hitting an intraday low of $20.25 - the lowest price seen for the stock since June 2000.

But perhaps most remarkable was Callan’s closing comment; she took the high road when given a chance to rejoice over Bear Stearns’ folly.

“We have great sympathy for our colleagues at Bear Stearns and are all very sad about what happened to that organization. So, yes, I’m sure there will be opportunities for market share. Yes, did they have capabilities in some of our core competencies, absolutely. But there are so many other things that relate to the fallout of Bear Stearns that are so fundamental to our industry, I would say it’s hard at the moment to get too focused on what’s the upside for us. I think there’s a lot to be thought about for the industry as a whole related to that situation.”

It seems there might be some integrity on Wall Street, after all.

Bargain-hunting investors everywhere have begun to pick up on the fresh trail of broker stocks, but, according to Sanford C. Bernstein & Co., it’s not the time to jump in just yet.

“The stock prices of large capitalization security firms are testing recent lows and price-to-book valuations are all within the bottom two deciles of their historic trading ranges,” Bernstein said. “Typically, this would represent an excellent entry point for these firms. However, the current environment is anything but typical.”

While its price target for the group implies an average 44% upside over the next six to 12 months, Bernstein recommends investors stay on the sidelines until the credit and liquidity crunch stabilizes, taking into account that these firms rely on the health of the credit markets to finance their heavily leveraged balance sheets.

“The brokers are susceptible to further book value deterioration,” the firm added. “We believe there are several more write-downs to come as the financial leveraging that had benefited the group and the overall financial market during 2004 to the first half of 2007 continues to unravel.”

Bernstein rates Bear Stearns, Goldman Sachs, Lehman Brothers, and Merrill Lynch all at a market perform, and gives its lone outperform rating among the group to Morgan Stanley.

Apparently the bargain hunters were listening, as shares of Bear Stearns, Lehman Brothers, and Merrill Lynch all sank to new 52-week lows in mid-day trading. Bear Stearns was the biggest decliner on the day, tumbling 13% to a five-year low of $60.26.

“The credit markets are experiencing historical levels of turbulence. Problems are emerging in nearly every corner of the market, even those once considered safe (i.e. money market funds, municipal bonds),” Bernstein said. “As you know, it is impossible to forecast the credit markets, so until we begin to see stabilization we would avoid exposure to these names.”

And just when the hunters thought they were closing in for the kill.