Bond results for the big investment firms begin to look weak

Lehman Brothers Holdings Inc (NYSE: LEH) reported a 27% increase in 2Q profits, generally good results. However, the deteriorating subprime business and drop in bond prices and higher interest rates are beginning to show up in results.

"This is the beauty of having a diversified business mode," Lehman Chief Financial Officer Chris O'Meara said in an interview. "We're in a strong market environment with interest rates low, equity valuations staying strong, and activity levels continue in trading. We're optimistic."


Take the Lehman Brothers executive's optimism with a grain of salt. Much of the money made in the early part of this decade by the large investment firms have been from mortgage-related and other leveraged loan products. When the mortgage market began to roll-over, many mortgage trading companies went out and purchased subprime portfolios before the full impact of the subprime meltdown was felt. If one was extremely cynical, it could be suggested the mortgage trading operations were buying up loans to mask a slowdown in performance. But that has never happened on Wall Street before. Ha! Ha!

Expect more trouble in fixed income results for the big investment firms. Bear Stearns Companies Inc (NYSE: BSC) reported some of the strongest results in the mortgage market during the past five years, therefore, this stock is particularly worth watching.