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Lehman Bros. Earnings Ease Market Fears

MICHELE NORRIS, host:

NORRIS: Even before the Fed's big rate cut, shares of financial firms started bouncing back today on Wall Street. The most dramatic was Lehman Brothers, the investment banking firm was rumored to be the next possible victim after the implosion of Bear Stearns. But after releasing better than expected earnings today, Lehman's stock rose 46 percent.

NPR's Chris Arnold has that story.

CHRIS ARNOLD: Lehman Brothers has been aggressively trying to fight rumors that it was falling apart. Today, the company's chief financial officer, Erin Callan offered a lot of details about the company's financial picture during a conference call. She was basically saying that company is still turning a profit and it's a pool of billions of dollars worth of assets and it's not about to go bust.

Ms. ERIN CALLAN (Chief Financial Officer, Lehman Brothers): We can tap into this pool to get additional cash at any time.

ARNOLD: Still, Callan wasn't too rosy about the economy and the financial markets.

Ms. CALLAN: We don't expect that this extremely challenging period is going to end (unintelligible). However, we do believe, we have the leadership, the experience, the risk management discipline, the capital strength and certainly the liquidity to ride out the cycle.

ARNOLD: So things may not be so bad that we're going to see the failure of another major investment bank inside of a week. Most economists think the Fed helps by offering to loan investment banks money directly if they needed. But, beyond that immediate crisis, it's still pretty scary out there to some people on Wall Street trading floors.

Mr. WILL ASTON-REESE(ph): (Vice President, Money Market Sales, Tradition Asiel Securities): I'm very scared. Yeah.

ARNOLD: Will Aston-Reese is the vice president of money market sales at the broker dealer Tradition Asiel Securities.

Mr. ASTON-REESE: I'm not a naysayer or anything but I just think that we could be on that - just on the precipice looking down into the abyss right here. I really do.

ARNOLD: Aston-Reese put together large institutional investment and CD's issued by all kinds of banks.

Mr. ASTON-REESE: Were talking, you know, hundred million, 500 million, a billion in one issuance. And so to have the sources of funding this type of funding dry up is really puts a crimp on, you know, their day-to-day operations.

ARNOLD: And it is drying up, Aston-Reese says despite all the efforts by the Fed, this part of the market hasn't been functioning right since the credit squeeze hit last summer. Investors who use to (unintelligible) a yearlong CDs won't touch anything longer than a few months. The worry is that tightness of credit will ripple to the whole economy and mean less hiring, more layoffs, bigger recession.

Mr. ASTON-REESE: People are unwilling to lend long. They're waiting for another shoe to drop. What's the next shoe that's going to drop? Is going to be bank A this time? Is it going to be bank B? You know, that is it going to be dealer A, dealer B? They don't know. That's the same thing that we've seen since this has hit last August. And this is why I'm saying that nothing has really changed.

ARNOLD: In other words, nobody knows which bank or hedge fund or company will be the next to announce crushing loses from subprime loans, so the Fed's actions have limits.

Bill Cheney is chief economist at John Hancock.

Mr. WILLIAM CHENEY (Chief Economist, John Hancock): I think the Fed is totally on the ball in terms of what it can do.

ARNOLD: A growing number of economists think more drastic action is called for. One idea that's getting a lot of attention right now is a government bailout similar to the one in the savings and loan debacle. The idea is the government would basically buy up the millions of problematic loans to slow foreclosures and get the bad investments off of everybody's books.

Mr. CHENEY: I think I would still argue against it right now.

ARNOLD: Cheney says he thinks it would be healthier for the companies that made bad debts on some subprime loans to pay the price for it. But he admits the government can't take too long to make up its mind about doing more.

Mr. CHENEY: I think it makes excellent sense for the folks in Washington to be working out contingency plans and negotiating what would go into it, if they have to take action.

ARNOLD: Cheney says the longer the credit markets stay fouled up, the worst the damage to the already stumbling economy.

Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Chris Arnold
NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.