Wall Street is bracing itself for surging losses and another $3 billion worth of write-downs at Lehman Brothers, when the US investment bank publishes its third quarter figures next month.

Banking analysts in New York have started telling their clients that they believe that Lehman Brothers will be forced to admit to much bigger losses than previously expected as the credit crisis shows no end in sight.

Concerns about the state of Lehman's balance sheet come amid reports that the bank is planning to sell off a stake in its very successful fund management business, and to dispose of its real estate asset portfolio.

Sanford Bernstein, the Wall Street broker, today told clients that it now expects Lehman to post losses per share of $1.40 for the third quarter of 2008, compared with its former forecast of earnings per share of 74 cents. It said that it now expects the bank to report a loss of $867 million for the three-month period, rising to a total estimated loss for the year as a whole of $2.57 billion.

While the broker has lowered its estimates for Goldman Sachs and Morgan Stanley as well, it highlighted Lehman's predicament because of its substantial exposure to mortgage-backed securities.

Sanford Bernstein said: “The firms we cover (Lehman in particular) continue to have significant exposures to the troubled asset classes. With the exception of leveraged loans, these exposures have proven difficult to remove or to hedge effectively as the market for these positions remains relatively illiquid. As a result, as long as these firms have these troubled assets on their balance sheets, their earnings results will be affected by the fluctuations in the fixed income market.”

Lehman Brothers has not yet told shareholders the date of the publication of their third quarter results, but it is believed to be in the middle of next month.

Last week, Deutsche Bank in New York also told clients that it was expecting a worse performance from Lehman Brothers and that it had pencilled in a write down of $3 billion for the third quarter.

In a research note published on August 13, the German bank warned its clients that Lehman, at the end of the second quarter, was still exposed to $30 billion worth of commercial mortgage and real estate assets, leveraged loans of $18 billion, and $3 billion worth of American sub-prime securities on its balance sheet.

Deutsche cited weaker capital market revenues and an anticipated recession in Europe as serious risks to Lehman's performance and said that it now reckoned the US bank would post a $2.68 loss per share for the third quarter compared with previously forecast earnings of 33 cents.

Another banking analyst, who declined to be named, said: "The problem we have with Lehman is that we really don't know what's been happening with their balance sheet. They said that they were done with deleveraging, but we just don't know. Everyone has exposure to problematic fixed income securities, but Lehman is the most exposed. We are expecting write-downs for this quarter, probably around $3 billion. They have a very good asset management business, but the real problem for them is getting rid of some of their bad assets, which is a challenge especially in this environment."

Shares in Lehman fell 0.54 per cent to $13 in afternoon trading.

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