Troubled investment bank Lehman Brothers reported its results a week early, revealing a larger than expected US$3.9 billion loss for the third quarter.

The loss is accompanied gross mark-to-market adjustments of US$7.8 billion, US$5.6 billion, after hedging gains and debt valuation gains. The firm said it is reducing exposure to residential mortgages, commercial real estate and other illiquid assets.

Lehman is spinning off the vast majority of its commercial real estate assets into a new, separate public company; and announced plans to sell a majority interest in its investment management division. The company is also reducing its dividend to 5¢ per share.

The firm’s chairman and CEO, Richard Fuld, said, “This is an extraordinary time for our industry, and one of the toughest periods in the firm’s history. The strategic initiatives we have announced today reflect our determination to fundamentally reposition Lehman Brothers by dramatically reducing balance sheet risk, reinforcing our focus on our client-facing businesses and returning the firm to profitability.”

On the news, Fitch Ratings placed its ratings for Lehman on Rating Watch Negative, citing, “heightened pressures that have adversely limited, in Fitch’s view, Lehman’s financial flexibility, most acutely, its ability to raise capital.”

Fitch noted that capital raises over the past 12 months have offset operating losses, however, the costs of the most recent raises are considered steep relative to its historic valuation and reputation. “In the likely event that additional capital is required — due to more writedowns, valuation adjustments and/or trading losses — the cost could be prohibitively expensive given investors’ decreasing appetite for financial institutions exposure,” it said.

Core operating profitability is expected to be challenged in the second half of 2008, the rating agency said. “Trading volumes may contract for both institutional and retail investors. In addition, the lack of a securitization market may also result in lower revenues compared to historical results. Additional losses emanating from high risk exposures are expected to occur, although the magnitude may be tempered by asset reductions and successful asset sales around existing marks,” it said.