Lehman CFO Says Market Recovery May Take Until 2009

April 11 (Bloomberg) -- The global credit market crisis worsened last month and recovery for the securities industry may take until next year, Lehman Brothers Holdings Inc. Chief Financial Officer Erin Callan said.

``March was a very, very tough month,'' Callan, 42, said in a Bloomberg television interview in New York today. ``I don't see what the real catalyst for change would be over the next several months. We've got to look out to 2009 for where we're going to change.''

Callan's remarks contrast with comments yesterday by Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc. Blankfein told shareholders at the firm's annual meeting that ``we're closer to the end than the beginning'' of the crisis. John Mack, Morgan Stanley's CEO, said earlier this week that the credit-market contraction will probably last ``a couple of quarters'' longer.

``Others may be more optimistic about how soon it will come to an end,'' Callan said. ``I do think there is reason for some optimism about the industry and the markets as a whole for 2009.''

Lehman, the fourth-largest U.S. securities firm, said on April 9 it had to bail out five short-term debt funds crippled by frozen credit markets. The firm took $1.8 billion of assets from the funds onto its books, and recorded a $300 million loss in the first-quarter. Earlier this month New York-based Lehman raised $4 billion from a stock sale, seeking to quell concern the firm was low on capital.

`Fear and Paralysis'

March was difficult because the collapse of Bear Stearns Cos. in the middle of the month created a ``sense of fear and paralysis'' about the securities industry, Callan said.

Derivatives used to hedge cash securities also diverged widely from their usual levels, she said. Investors were using indexes of credit-default swaps, which typically rise when perceptions of company creditworthiness worsen, to hedge against losses on everything from stocks to collateralized debt obligations. The indexes started to drop in mid-March at a faster rate than underlying securities improved, leaving investors with losses.

``There are still a number of reasons why there are challenges in the credit markets that don't have an immediate answer,'' Callan said. ``There is overwhelming negative sentiment that's still out there.''

Lehman Writedowns

The world's biggest banks have recorded $245 billion in asset writedowns and credit losses since the beginning of 2007. Lehman took $1.8 billion of writedowns on mortgage-related assets in the first quarter, as it avoided the much bigger losses reported by rivals such as Merrill Lynch & Co. Merrill posted $25.1 billion of writedowns in the second half of last year.

Credit problems are now spreading beyond banks. General Electric Co., the world's third-largest company by market value, unexpectedly reported its first quarterly profit decline since 2003, saying that a freeze in credit markets in late March forced it to cut the value of some securities and blocked asset sales.

The GE report ``gives you a bigger message of a broader implication for that state of the economy,'' Lehman's Callan said. It also ``put to rest'' the notion that different markets around the world aren't linked to each other.

Lehman's own plan to weather the crisis is to cut the amount of risky assets it holds and reduce its reliance on borrowed money, or leverage, Callan said. She said she expects the industry's business model to shift to lower leverage on assets that provide a higher return to help compensate.

The number of employees in the securities industry won't change ``dramatically,'' Callan said, although an increasing number may be located in developing countries.

Shares of Lehman, which have dropped 39 percent this year, declined 38 cents to $39.87 at 4:12 p.m. in New York Stock Exchange composite trading.