Lehman Brothers to Set Tone for Wall Street's Third Quarter on Tuesday

NEW YORK (AP) -- Lehman Brothers Holdings Inc. will set the tone for Wall Street's fiscal third quarter when the investment bank reports results Tuesday morning. Following is a summary of key developments and analyst commentary related to the period.

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OVERVIEW: The New York-based brokerage will provide investors their first glimpse into how Wall Street quantifies the risk and turmoil that affected the market this summer.

Lehman's stock lost more than a quarter of its value during the third quarter, and analysts polled by Thomson Financial expect earnings per share to decline 6 percent.

However, analysts' estimates typically exclude non-cash charges, and charges are perhaps the most important feature of Wall Street's earnings this quarter.

Stung by decaying credit quality, investors embarked on a flight from risky debt like bonds financing corporate takeovers and pools of home loans. Analysts expect Lehman to record accounting charges reflecting how much value these products have lost in the past two months.

The investment banks have some leeway in telling the market what their assets are worth, though.

Certain investments like stocks and Treasury bonds are easy to value because they trade constantly in transparent markets. Other investments, like leveraged-buyout financing commitments or certain classes of mortgage-backed bonds, are much harder to value.

By reporting first, Lehman Brothers could set an important precedent for the other banks in recording the worth of these more opaque investments.

EXPECTATIONS: Analysts expect Lehman to report a third-quarter profit of $1.47 per share on revenue growth of 3 percent to $4.23 billion.

ANALYST TAKE: "We could get our first glimpse of just how bad things have been with the brokerage firms right in the thick of it all," Keefe, Bruyette & Woods analyst Lauren Smith wrote in a client note. "These markets are undergoing a complete metamorphosis and restructuring of risk."

Smith recommends investors avoid putting money into Lehman Brothers, which has heavy exposure to the mortgage industry.

Wachovia Capital Markets analyst Douglas Sipkin said he believes investors are too pessimistic. Lehman has diversified its business into other countries, so the crisis in the U.S. does not mean as much to the company.

Sipkin believes investment banking stocks are undervalued if the credit markets stabilize. However, if the turbulence in the subprime mortgage markets spreads much farther, the sector will continue to struggle, he said.

SHARE PERFORMANCE: Lehman's stock fell 26.4 percent during the third quarter to close August at $54.83

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