Turning adversity into opportunity is never easy. For now, however, Lehman Brothers continues to pull off that trick rather admirably. While investment banking revenues shrank 11 per cent year-on-year in the third quarter, surprisingly solid results in trading and investment management more than made up for the decline.

As importantly, Lehman’s investors have recently taken the edge off their very high expectations. Since the spring peak, the investment bank’s shares have lagged both rivals and the broader market. Unusual factors also helped Lehman beat expectations this quarter in areas such as equity capital markets, where a $200m year-on-year jump in revenues partly reflected $54m in private equity gains, compared to $30m last year.

More importantly, though, Lehman is beginning to offer some tantalizing hints of how it may have become less susceptible to risks surrounding key US businesses, having invested heavily in recent years to diversify its revenue streams. In mortgage origination, for example, which has been one of its biggest money-spinners, there is encouraging growth in its non-US operations.

The main problem, for Lehman and its rivals, is that investors are still too optimistic about the long-term profitability of those activities. Few would expect its return on tangible equity to remain at its current level of 26.1 per cent during a downturn. But fewer still appear ready to accept that innovation eventually attracts competition.

Lehman’s US mortgage origination platform, which many of its Wall Street rivals are busily imitating, is a case in point. Lehman argues that building a similar presence from scratch would take many years. Unfortunately, it might be that long before the sector again benefits from such benign conditions as those created by the ultra-loose monetary policy of the past few years.

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