March 18 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm, reported earnings that beat analysts' estimates and reassured shareholders that it has more than enough capital to survive.

Lehman surged 46 percent in New York trading, erasing yesterday's record decline. First-quarter net income fell 57 percent to $489 million, or 81 cents a share, the New York-based company said in a statement today. Analysts had estimated Lehman would earn 72 cents a share.

Chief Executive Officer Richard Fuld is trying to persuade clients and creditors that Lehman will avoid the fate of Bear Stearns Cos., which ran out of cash last week and was forced to sell itself to JPMorgan Chase & Co. at a fire-sale price. Lehman had $30 billion of cash and $64 billion in assets that could easily be turned into cash as of yesterday, Chief Financial Officer Erin Callan said on a conference call with analysts.

``Surprisingly, they've taken few hits,'' said Carlos Mendez, senior managing director at Institutional Credit Partners in New York, which oversees $14 billion including credit-default swaps on Lehman debt. ``That didn't happen by mistake. That is prudent risk management.''

Earnings were depressed by a $1.8 billion writedown caused by the slump in the mortgage market. Reducing the value of those assets pushed fixed-income revenue 88 percent lower, to $262 million. Equities revenue rose 6 percent to $1.4 billion, and merger advisory fees climbed 34 percent to $330 million. Investment-management revenue jumped 39 percent to $968 million.

Revenue Declines

Total revenue fell 31 percent $3.5 billion. Return on equity, a measure of how effectively the firm reinvests earnings, was 8.6 percent, down from 24 percent a year earlier.

Goldman Sachs Group Inc., the world's biggest securities firm, also reported earnings that beat analysts' estimates. Profit at the New York-based firm fell 53 percent to $1.51 billion, or $3.23 a share. Analysts had predicted $2.59.

Goldman Chief Financial Officer David Viniar said he is ``totally confident'' in Lehman's ability to weather the current financial crisis. ``We think they're a very, very good firm and we think they will continue to be,'' Viniar said in an interview today. ``They're a good, healthy competitor.''

Lehman rose $14.74 to $46.49 in New York Stock Exchange composite trading at 4:15 p.m. Goldman, which fell 3.7 percent yesterday, gained 16 percent to $175.59. U.S. stocks rallied the most in five years after the Federal Reserve cut its benchmark interest rate by 0.75 percentage point.

`Not Bear'

Credit-default swaps tied to Lehman's bonds fell 115 basis points to 315 basis points, according to broker Phoenix Partners Group. That was a record drop for the contracts, which protect against the risk Lehman will miss payments on its bonds.

``Lehman is not Bear,'' Deutsche Bank AG analyst Michael L. Mayo said in a report yesterday. ``It has more liquidity. It has support among its major counterparties. Its franchise is more diversified.''

Fuld, 61, has announced plans to cut 5,300 jobs, or 19 percent of the workforce, and closed mortgage units during the past seven months, initiatives designed to help Lehman grow faster than its peers once markets recover. He also has expanded in Europe and Asia to gain market share in stock trading.

The firm now ranks as the largest trader on the London Stock Exchange and Euronext. Lehman has risen to fourth from sixth on the New York Stock Exchange and Nasdaq. Its share of U.S. bond trading has increased by 1 percentage point to 12 percent.

Cash Holds Up

Lehman's stockpile of cash, money-market instruments, corporate bonds and equities available for sale is the largest among the five biggest brokers, according to Sanford C. Bernstein & Co. analyst Brad Hintz.

The firm's cash reserves were down $4 billion by the end of yesterday compared with the end of last month, Callan said. That was due to the retirement of commercial paper that matured. Lehman has ``minimal reliance'' on commercial paper or asset- backed commercial paper, Callan said. Lending through those short-term instruments has dried up since the collapse of the mortgage-bond market.

``Our liquidity framework was designed after our 1998 experiences, which was this type of an environment,'' Callan said.

The firm hasn't lost any repo funding capability in the last several weeks, Callan said. Bear Stearns was refused that source of short-term funding by some counterparties last week when speculation about its cash shortage peaked.

Fed Helps Brokers

Bear Stearns also ran out of cash because hedge fund clients withdrew some of their balances from the firm. While some $2 billion to $3 billion of the free cash hedge funds held at Lehman has been withdrawn, that had no effect on cash reserves because Lehman, unlike Bear Stearns, doesn't use those balances as part of its cash funding, Callan said in an interview today.

Fed officials were instrumental in pushing through the JPMorgan deal for Bear Stearns as part of an effort to halt the erosion of confidence in financial firms. The central bank simultaneously announced that it would allow brokers to borrow from its discount window, typically open only to commercial banks, and would accept securities as collateral.

Mendez at Institutional Credit said securities firms' cash holdings have become less important after the Fed move.

``These guys can fund themselves,'' Mendez said.

Lehman executives were making calls to clients all day yesterday as the firm's share price came under pressure, assuring them there wasn't a cash shortage, Callan said in the interview.

AAA Bonds

The firm is ``very well hedged'' against its risk on mortgage-related assets, Callan said. Its bets against subprime assets exceed the holdings of related securities, making the firm ``net short'' on subprime, she said.

The hedges protected Lehman from bigger losses on mortgages and bonds backed by the loans, Callan said. More than 80 percent of mortgage bonds held on the balance sheet are AAA-rated, she said. Prices of AAA-rated mortgage bonds have declined as little as 2 percent in the previous quarter while lower-rated securities lost as much as 20 percent.

Commercial mortgage-related assets caused $700 million of the writedowns last quarter, Lehman said. An additional $800 million came from residential home loans and securities tied to them. The leveraged loan portfolio had a $500 million valuation reduction.

Leveraged Loans

The firm further cut its leveraged loan commitments during the quarter, lowering its exposure to $3.7 billion from $9.7 billion at the end of the previous quarter. The commitments totaled $27 billion at the end of August.

Years of diversification have helped Lehman weather the storm, Wachovia Corp. analyst Doug Sipkin said.

``Positives are diversity,'' Sipkin said in a note to investors today. ``Lehman is not a fixed-income shop. Equity trading, banking and asset management accounted for 93 percent of revenues.''

International business growth increased the share of revenue from outside the U.S. to 62 percent during the quarter. It was 50 percent during 2007.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: March 18, 2008 19:55 EDT