Key questions and answers from the second quarter earnings call conducted by Lehman Brothers Inc. (LEH: chart) on June 16, 2008.

Meredith Whitney (Oppenheimer & Co.): What steps are you going to take either on a revenue side or on a cost side to ensure a mid-teens ROE and what timetable are we looking at for that?

Ian T. Lowitt: If we maintain our leverage ratio in the low double-digits, we would have net assets of probably $400 billion to $410 billion. If you are looking at revenues to assets, you’d need between 4.7 and 4.9 in order to get you to the $4.9 billion to $5 billion of quarterly revenues.

Given the extra balance sheet that we have and historical levels of revenue to assets, you can see how you could get to $4.9 billion to $5 billion of quarterly revenues and then when you play that through the comp and NPE, a little bit below $1 billion and a 30% tax rate, that translates after the preferred payouts to a number that generates 15% ROE on our new common equity.

Glenn Schorr (UBS): In terms of the actual sales that took place during the quarter in both the residential and commercial books, could you make any comment in terms of vintages sold versus your last disclosure at the conference in May?

Ian T. Lowitt: The sales were across sort of all asset classes, across all the types.

Glenn Schorr (UBS): Comment on the ratings downgrade last month?

Ian T. Lowitt: Their focus is on the earnings power going forward. They are very comfortable with the capital.

Glenn Schorr (UBS): Do you expect anything in terms of material changes from the regulatory standpoint?

Richard S. Fuld Jr.: If they are going to give the investment banks access to the window, I do believe they have the right for oversight. What that means though particularly as far as capital levels or asset requirements, way too early to tell.

Guy Moszkowski (Merrill Lynch): The whole loan balance in Europe came down by about $1.4 billion and the securities balance rose by $1.2 billion, does that reflect some restructuring of whole loans into securitized assets to facilitate later sales?

Ian T. Lowitt: It was a transfer from whole loans to securities but it was to improve the liquidity characteristics, and that was really what drove that. As part of our efforts post Bear, we talked about our efforts to convert unencumbered collateral which was 100% cash capital into securities which were available for financing.

Prashant Bhatia (Citigroup): At the point where you took down quite a bit of exposure there but in not taking down more, was it a decision that there was not enough liquidity in the marketplace? –

Ian T. Lowitt: Around the residentials, broadly we are comfortable with the level that we’ve now got to. We plan to obviously change the composition of it as we trade in and out, but we are comfortable with that level.

With regard to commercials, we still plan to reduce that over the period but we want to do that in a measured way so that we do not affect value.

William Tanona (Goldman Sachs): At the level three assets, how much of that $38 billion is actually going to be mortgage related?

Ian T. Lowitt: We did have $40 billion of level three in the first quarter and if you look at the composition of that, probably about $9.5 billion of that was in corporate equity and about three was in derivatives.

With regard to where mortgage and asset-backed securities is likely to be, it really is too early in this process for me to give you a sense of that, but it’s more likely to be down.

And then with regard to the European portfolio, where we have valued the European mortgages is a 28% decline in housing prices and what we have seen is 7%, so we believe that the marks that we have are conservative.

William Tanona (Goldman Sachs): In terms of the revenue breakdown by region, can you just help me understand exactly why the revenues had changed so dramatically in those specific regions?

Ian T. Lowitt: What we have seen is essentially a very even distribution this quarter. It is followed essentially the same pattern, so we did not see diversification in the form of higher revenues in Europe and Asia and the big losses in the U.S.

The impact of the quarter, which included write-downs but also included principal, included trading, was evenly bad across each of the different regions.

Douglas Sipkin (Wachovia): Comment on the record prime brokerage revenues?

Ian T. Lowitt: Even though there is some modest decline in balances, the business is restructuring. It used to be that the financing was all done essentially at the same price, irrespective of asset class and the term of the financing.

What we have seen, particularly in the post Bear period, is that the prime broker pricing has become much, much closer to the repo pricing and as a result there’s a real curve there now for financing.