US bank takes $700m credit crunch write down

US investment banking giant Lehman Brothers yesterday disclosed that its exposure to sub-prime debt pools had hit revenues by $700m (£350m).

The bank reported that revenues in its fixed-income business had plummeted by 47% to $1.1bn as it was forced slash values of debt instruments and derivatives and take the writedown.

'Within Fixed Income Capital Markets, the firm recorded very substantial valuation reductions, most significantly on leveraged loan commitments and residential mortgage-related positions,' Lehman said as it reported third quarter results for 2007.

The large scale write down is likely to calm fears that banks would airbrush their exposure to sub-prime debt. As markets for these instruments have frozen, banks can no longer reach valuations by 'marking-to-market' and have to use complex valuation models instead, which are open to subjectivity.

Lehman decision to take the hit from sub-prime exposure may be followed by Morgan Stanley, which reports today, and Goldman Sachs and Bear Stearns, who release Q3 numbers tomorrow.

UK markets will be paying close attention to how the US banks book their exposure to securitised debts into their accounts

'Valuing these instruments is a subjective process and how the US banks mark down their portfolios will provide some information on what to expect in illiquid markets,' said Richard Barnes, banking analyst at Standard & Poors.

Further reading:

See the full Lehman Brothers results