NEW YORK - Lehman Bros. Holdings Inc. reported its third straight quarter of falling earnings yesterday, because of turmoil in global credit markets. But the company managed to offset most of its problems and easily beat Wall Street expectations.

Lehman, the largest U.S. underwriter of mortgage-backed bonds, relied on a strong performance from its equities business to compensate for losses from the subprime-mortgage collapse. The New York-based investment house was able to offset most of a $3.5 billion write-down with transactions designed to curtail its losses.

"November was absolutely the worst month ever on record for the fixed-income markets," said Lehman chief financial officer Erin Callan. "We expect it to be challenging for the better part of 2008, and we may see further valuation reductions from here."

However, Callan said she was optimistic about Lehman's competitive position, compared with others on Wall Street - and that showed in the company's quarterly numbers. For the three months ended Nov. 30, profit after paying preferred dividends was $870 million, or $1.54 a share, compared with $987 million, or $1.72 a share, a year earlier. Revenue fell 3 percent, to $4.39 billion from $4.53 billion a year earlier.

Analysts polled by Thomson Financial projected a profit of $1.42 a share on revenue of $4.26 billion.

While Morgan Stanley and the Bear Stearns Cos. Inc. are expected to record charges, the Goldman Sachs Group Inc., which also reports next week, is expected to fare the best among the investment banks.

Chris O'Meara, Lehman's head of risk management, said in a conference call with analysts that "subprime was a component" of the write-downs, but that problems had spread into other asset areas, including prime mortgages and student loans. He said the investment bank had about $5.3 billion worth of subprime exposure on its books.

Lehman shares fell 45 cents yesterday to close at $61.37.