Lehman Brothers conceded yesterday that it had lost more than $700 million (£350 million) from the credit crunch in its third quarter, as it reported its first quarterly loss in five years.

America’s largest underwriter of mortgage bonds reported a 47 per cent decline in third-quarter revenues, to $1.06 billion, at its fixed-income business, which it blamed on “very substantial valuation reductions” on mortgage-related securities and loans backing leveraged buyouts.

Despite making “large valuation gains” from hedging against the credit crunch, the declines in the bank’s mortgage and leveraged loan assets, as the sub-prime homeloan crisis spread, meant that it was still about $700 million out of pocket for the three months to September.

However Chris O’Meara, its chief financial officer, said that the “worst of this credit correction is behind us”, adding that the present market presented “trading opportunities”.

Lehman’s bond woes were partially offset by a 48 per cent jump in investment banking income, as deal advisory revenues more than doubled, from $195 million to $425 million. The bank advised on the $11.6 billion sale of General Electric’s plastic division to Saudi Basic Industries and on the $8.5 billion disposal of Home Depot’s building supplies unit.

Third-quarter net income for the group was down 3 per cent, to $887 million, from the year-ago period and was 32 per cent lower than the record $1.3 billion set in the previous quarter.

Net revenue for the group, or total revenue minus interest costs, rose by 3.1 per cent, compared to the year before, to $4.31 billion. Asset management and retail brokerage fees jumped by 33 per cent to $802 million, while revenue outside the United States accounted for 53 per cent of the total.

Shares in Lehman Brothers have fallen by about 25 per cent this year as investors fretted about its large exposure to mortgages and high-risk loans to support about $16 billion of pending leveraged buyouts.

Lehman has cut about 2,500 mortgage-related jobs this year, the bulk of them coming from its closure in August of its BNC Mortgage sub-prime business. Some further cuts are expected.

However, the shares rose by $2.08 to $58.62 in midday trading because the decline in profits was lower than expected.

David Easthope, senior analyst at Celent, a Boston-based financial research and consulting firm, said: “Pessimists will cite that fixed-income business was down almost 50 per cent, because of weak credit and securitised products. However, the equities and derivatives business was strong, as was investment management.” Lehman’s results come as the British markets remain gripped by the plight of Northern Rock, the fifth-largest mortgage lender, which was forced to seek funds from the Bank of England late last week.

Northern, which faced a small exposure to US sub-prime mortgage markets, was caught out when the short-term lending markets that it had been using to fund its expansion dried up as the markets fell.

Lehman was the first Wall Street firm to report its third-quarter results. Morgan Stanley will unveil its figures today and Goldman Sachs and Bear Stearns will report tomorrow.

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