Wall Street watches Lehman walk on thin ice

Mar.17, 2008 in Market Outlook

By Riley McDermid, MarketWatch

Last Update: 4:56 PM ET Mar 17, 2008

NEW YORK (MarketWatch) — Analysts who cover broker Lehman Brothers Holdings Inc.
are watching closely from the sidelines Monday, loath to add to market
speculation that the firm may be the next major brokerage to falter.

Maintaining investor confidence will be key to keeping Lehman (LEH) afloat, at
least for now, according to BMO Capital Markets analyst George Lazarevski.

“Similar to Bear Stearns, the greatest risk for Lehman Brothers is the risk that
once speculation begins, it becomes a self-fulfilling prophecy, and no level of
liquidity will be sufficient,” he told investors Monday.

Shares of Lehman Brothers recovered more than half of their earlier losses of
more than 40%, and ended the day off about 19%. The move was still the biggest
one-day drop in Lehman shares since the firm went public in 1994, and reflected
just how nervous investors are after being rattled by an 11th-hour bailout of
rival Bear Stearns Cos. (BSC).

The roller-coaster ride experienced by Lehman showed how volatile the market can
be, some analysts said, a major worry just days after the storied Bear Stearns
was taken down.

“If market participants begin to fear that another bank is facing a liquidity
crisis, we could see another collapse,” wrote Morningstar analyst Ryan Lentell in
a research note.

“Rumors of problems at Bear gained traction because of the bank’s exposure to the
residential-mortgage market, which has been in turmoil,” he said. “The investment
banks all have exposure to these asset classes, and as fear over further price
declines in any one asset class escalates, it could lead to a run on another
bank.”

Options traders are making big bets that Lehman stock will drop an additional 24%
by Thursday, when March options expire, Dow Jones Newswires reported. Traders
also are betting that the shares will continue to plummet over the next month.

But Deutsche Bank (DB) analyst Mike Mayo said Monday that fears of a Bear
Stearns-like meltdown for brokerage Lehman Brothers are overblown.

“Lehman is not Bear,” he commented, adding that Lehman has more liquidity, more
support from counterparties, a more-diversified franchise and a “seasoned and
experienced” chief executive.

“While there is a chance that we have not factored in all the needed write-downs,
we believe that this difference creates a reasonable margin of safety,” Mayo
wrote in a research note.

Deutsche Bank maintained its “buy” rating on the stock. Other market players were
not so optimistic about the broker.

Early Monday, Moody’s Investors Service trimmed its outlook on the investment
bank’s debt rating, heightening concerns about liquidity. The ratings agency
affirmed its A1 rating on the senior long-term debt of Lehman but lowered its
outlook on the ratings to stable from positive.

Moody’s said its ratings action “recognizes that Lehman has navigated quite well
to date through persistently volatile and challenging financial markets, the
sharp marketwide decline in valuations across numerous asset classes, tight
global-liquidity conditions and the strong headwinds facing Lehman’s (and other
securities firms’) core-earnings drivers.”

“However, these conditions have decreased the upward pressure on Lehman’s rating,
and therefore a positive outlook is no longer warranted,” according to Moody’s.

UBS also downgraded Lehman to neutral on concerns that the bank will see further
trouble in the capital markets.

If the current losses hold throughout Monday’s session, it would easily be the
stock’s biggest one-day percentage drop since they started publicly trading in
May 1994.

Previously, the biggest one-day percentage drop for Lehman shares was 18.6% on
April 14, 2000, in the thick of the dot-com meltdown.

Rival brokerages Morgan Stanley (MS ) and Goldman Sachs Group (GS) also saw their
shares significantly lower in premarket trading — down nearly 7% and nearly 8%,
respectively.

Another shoe to drop?

Touching off the shivers on Wall Street, JPMorgan Chase & Co. (JPM) agreed to buy
struggling brokerage Bear Stearns for $236 million, or $2 a share, in an
unprecedented rescue supported by the Federal Reserve. The Fed also moved to cut
the discount rate to 3.25%.

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