Lehman to cut another 850 jobs

Lehman Brothers plans to cut another 850 jobs as it restructures its mortgage business in the US and UK and closes its Korean mortgage operation.

The cuts will come on top of the 1,200 jobs that Lehman announced last month when it revealed it would close its subprime mortgage business, BNC Mortgage. The moves are expected to be a preview of similar cuts to come across Wall Street.

Lehman has now cut 2,050 jobs as a result of the current mortgage market turmoil, or about 7 per cent of its 28,323 workers. Most of the current cuts will come in the US, with a smaller amount in the UK and Korea.

Other banks are expected to cut back on mortgage and securitisation staffs in the coming months to reflect decreased investor demand for securities backed by mortgages and other assets.

Some analysts have suggested the banks will have to cut their securitisation staffs by 10 to 15 per cent to reflect the drop in demand for some products.

The sharp rise in defaults among US subprime mortgage borrowers has triggered a fall in the value of securities backed by the mortgages. That in turn led to big losses for hedge funds and others who held the securities and derivatives tied to them.

The mortgage problems have since spread to near-prime and jumbo loans and made investors wary of any securities backed by mortgages.

Wall Street firms bulked up in the home loan business in recent years, reaping huge profits sellling and trading mortgage-backed securities. Many banks including Lehman, Bear Stearns, Morgan Stanley and Merrill Lynch bought companies that sell mortgages to ensure a consistent flow of securitisation product.

Profits from the mortgage securitisation business are expected to be down for several years and the banks may have to take significant mark-to-market losses on mortgage-related securities they continue to hold.

Lehman, Goldman Sachs and Bear Stearns report third-quarter earnings in the week of September 17. Profits are expected to be down considerably from the second quarter, partly as a result of mortgage-related losses.

Lehman will take a $20m after-tax charge as part of the latest mortgage business restructuring but the larger hit will come from a decrease in ongoing revenues.