Banco Espirito Santo: Bank Capital Discussion

On June 2, 2008, Standard & Poor's Ratings Services lowered its long-term rating on Lehman Brothers to 'A' from 'A+', and re-affirmed their 'A-1' short-term rating. The outlook is negative. The rating action is in conjunction with their review of the global securities industry. The downgrade primarily reflects the concern that the pace and extent of earnings improvement could be considerably more muted than we previously assumed. Lehman's earnings performance in recent quarters has held up relatively well under current market conditions despite write-downs on troubled assets. However, with a first-quarter end in February, the effects of a particularly difficult operating environment in March will only be reflected in Lehman's second-quarter performance. Consequently, we expect a relatively meaningful deterioration in Lehman's second-quarter performance owing to a generally slower business environment, additional write-downs on certain troubled exposures, and the negative effects of hedges due to basis risk and de-levering of the balance sheet. Although we expect write-downs in subsequent quarters to be more muted, given the extent of write-downs to date, we are concerned that persistent dislocations in global capital markets could further weigh on core operating performance for the securities industry as a whole. Adjusted to exclude write-downs and negative hedges, we expect weakness in Lehman's operating revenues to be tempered by cost-cutting efforts that should begin to positively affect the pretax margin in third-quarter 2008. To respond to a nervous environment in which securities firms have come under pressure owing to their reliance on wholesale funding sources, Lehman has bolstered its liquidity and funding profile. Management has and continues to implement a number of measures to ensure sound liquidity and the ability to meet funding obligations in a stressed operating environment.