Live-Blogging the Lehman Brothers Conference Call

Lehman Brothers has been buffeted by market sentiment in the past few days in much the same way that Bear was before its sale. Deal Journal brings up an updated version of today’s earnings conference call. (Click here to watch our colleagues over at Marketbeat live-blog the Goldman Sachs Group call.)

Erin Callan, the firm’s new chief financial officer, kicks off the proceedings: There’s no question last few days have seen unprecedented volatility not only in our sector but across the whole marketplace. The acquisition of a major investment bank and the fed’s newly created funding facility designed to address this in a secured lending market in addition we have witnessed our own stock decline by 31% over the past two trading days.

She continues: So with that as a backdrop I would like to use this morning’s call as a real chance for us to take you through our performance, the strength of our liquidity and capital base, which I’m going to give you numbers through the close of business yesterday on liquidity, so everybody has that current.

10:05: Callan says, “We saw a quarter where our risk management discipline allowed us to avoid any single outsized loss.”

10:12: “With a decreased availability of credit we saw sponsor activity decline substantially and the volume of announced M&A declined 19% sequentially and 24% year-over-year. Also, M&A completed volumes were down 46% and 35 in the comparable periods. So overall very challenging backdrop on the Investment Banking side.”

10:15: We continue to have a strong underwriting position with financial institutions. We talked about that last quarter for both debt and equity. This quarter exemplified our billion dollar follow-on offering for M BIA, $3 billion preferred for WaMu, 7 billion preferred for Fannie Mae. We expect this demand will broaden due to other financial institutions capital needs including the regional banks.

10:16: Residential mortgage related positions accounted for $800 million net. …”So I think it’s fair to say we continue to do a very, very good job managing the risk on residential mortgages, an area that I think we’re credited with a lot of expertise, a great franchise.”

10:18: Leveraged loan exposures of $700 million (gross) show good risk mitigation, Callan says.

10:31: Callan tackles liquidity: “As we’ve discussed in the past, we have structured our 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.” The firm has minimal reliance on commercial paper and other short-term funding…”We have no reliance, and when I say no reliance, I mean we don’t use it to fund our balance sheet on customer free credit balances. We have no reliance on secured funding that’s supported by whole loans or other esoteric collateral.” She also says, “we know that those forms of short-term financing are not there for you in difficult markets.”

10:34: Callan estimates the firm has $100 billion of liquidity, including $64 billion of unencumbered assets at the holding company.

10:34: Total repo is $215 billion.

10:34: The Fed actions over the weekend were supportive and stabilizing. Although we have not used the facility, the rate and margin levels are attractive, so we expect the dealer community will access the program.

10:36: Lehman managed to close a renewal of athree-year syndicated unsecured bank facility this Friday, “on substantially similar terms to our prior facility,” Callay says.

10:37: Exposures for mortgages at $85 billion, down from $89 billion at 2007 year-end. Overall residential mortgage assets are down, but Lehman actually sold a fair amount of residential mortgage assets and bought opportunistically a number of assets on the market, Callan says.

10:39: Callan talks about valuing the residential mortgage securities. Alt-A mortgages became easier to value, and the firm used fewer models.

10:41: Delinquencies in commercial mortgages continue to be low at 40 basis points, she says.

10:42:Non-investment-grade financing exposures fell to $17.8 billion compared to $23.8 billion at year-end.

10:44: Monoline exposures remain minimal, Callan says.

10:44: On the Archstone deal, Lehman holds $2.3 billion of the non investment grade debt related to that transaction and $2.2 billion of equity both currently carry materially below par.

10:47: Lehman strategists expects U.S. growth to be minimal in both 2008 and 2009.

10:48: Strategic buyers are the strongest source of deals — to the tune of 84% of M&A activity coming from the strategic side.

10:51: The first question is from Meredith Whitney at Oppenheimer, who really appreciates Callan’s disclosure. Whitney asks whether a permanent buyer remains for securities not covered by the Fed facility. She also asked how Lehman’s regulatory capital is faring.

10:53: Callan says that the firm has been trying to deleverage in an orderly way, without taking too much of a hit from market prices. She also says regulatory capital has not materially changed since the end of the quarter. She says the firm is trying to “create the dry powder for opportunities to come our way.” When pricing hits the bottom, Lehman wants to be able to buy some fixed-income assets.

10:56: The next question is from Prashant Bhatia at Citigroup, who asks how Lehman plans to use the Fed facility — to delever the firm, or to help clients do transactions?

Callan replies that it’s for clients and a source of comfort for counterparties in the market to keep providing financing.

10:58: Bhatia asks how Lehman is doing on its capital plan.

Callan said it was a $23 billion plan, and Lehman has done about $16 billion of financings, which take care of much of its financing needs for the year.

11:03: Glenn Schorr of UBS asks for more detail on Lehman’s “unencumbered collateral.” The answer: it includes corporate loans and some residential mortgages.

11:05: Another analyst asks whether those unencumbered assets are of the quality that are pledgable to the Fed. Callan says the money is available to the broker-dealer at Lehman, not the holding company.

11:06: Brad Hintz from Sanford Bernstein asks about the firm’s leverage ratio, which is 1.2 compared to its rivals, which is less than 1.

11:07: Lehman proposes that it uses its own measure of leverage, which gives the firm a leverage ratio of .92. Hintz is depending on Moody’s data; Callan suggests they talk over the different data “offline.”

11:08: Lehman is still making a market in its own debt — which indicates that buyers are willing to take up Lehman debt. Hintz signs off by saying, “Difficult time out there.” Callan thanks him for his support.

11:09: Michael Hecht at Banc of America Securities asks about hard-to-value assets, or so-called “Level III” assets. Callan says the firm has $38.8 billion of such assets.

11:11: Hecht asks about headcount and asks what the firm’s approach is (Deal Journal interprets this as a subtle question about layoffs). Callan says the firm reduced 1100 at the end of the quarter. “At this point, we like the headcount against the opportunity. We don’t have any immediate plans to change that philosophy.”

11:13: The last question from Douglas Sipkin at Wachovia, who asks how long buyers can stay on the sidelines. Callan admits she struck a portion of her remarks where she said, “Fixed-income can’t stay on the sidelines forever.” She continues that it’s still a waiting game: “We deliberately take that out of the equation for now.”

11:15: Callan continues “I am hard-pressed to see the light at the end of the tunnel right now.”

11:16: Sipkin asks about how the downfall of Bear affects Lehman competitively, suggesting, “there has to be massive opportunities to pick up market share. Callan says, “we have great sympathy for what happened at Bear Stearns and are all very sad about what happened to that organization….it’s too soon to think about the upside for us.”

11:17: Well, that wasn’t too bad. Callan ends the call with an acknowledgement that she may have anticipated the questions of the analysts and tamed the beast, as it were — “we hope the fact that the questions were a little lighter reflect that we were able to give you more information during the course of the remarks,” she says, then continues, “we want to thank the people on the phone who have supported us through a very difficult environment we appreciate the partnership and the confidence in our organization, and I want to say that on behalf of all of the executive committee of Lehman Brothers. So thank you for joining us today.”