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Lehman fears sink Wall Street

The investment bank's growing woes wipe out optimism from Fannie and Freddie's rescue.

September 10, 2008|Walter Hamilton | Times Staff Writer

NEW YORK — The optimism about the financial sector that followed the government's weekend rescue of Fannie Mae and Freddie Mac lasted all of one day.

The stock market collapsed anew Tuesday as deepening troubles at another major financial institution -- investment bank Lehman Bros. Holdings Inc. -- triggered a broad market downturn that erased most of the previous day's gains.

The Dow Jones industrial average, which shot up almost 290 points Monday, tumbled 280 points Tuesday.

Lehman's stock sank a bone-rattling 45% after talks broke off between it and a state-owned South Korean bank over a possible equity infusion into the Wall Street firm. Its shares, which peaked at $85.80 in February 2007, dropped $6.36 to $7.79.

Concerns are growing that Lehman can't find investors willing to bolster its depleted capital base, a crucial step to ensure its survival amid enormous mortgage-related losses.

"To see such a large drop in the stock tells you investors were placing a significant amount of hope in the deal going through," said Kris Niswander, associate director of financial institutions at research firm SNL Financial.

Lehman's failure thus far to secure fresh capital is prompting increasingly feverish questions about its financial sturdiness, in part because of parallels between its woes and those that plagued Bear Stearns Cos. before it was forced to accept a fire-sale takeover by JPMorgan Chase & Co. in March.

The major risk, as it was for Bear Stearns, is that other Wall Street firms might stop doing business with Lehman out of fear that it won't be able to make good on its securities trades and other financial transactions.

"The ability to trade can go away because people just head for the hills," said Dan Alpert, managing director at Westwood Capital, a New York-based investment bank.

The concerns became so acute Tuesday that Goldman Sachs Group Inc. and other firms felt an obligation to declare that they were still trading with Lehman.

Lehman is on firmer financial footing than Bear Stearns was, but the firms share eerie similarities. And after the government's intervention Sunday with Fannie Mae and Freddie Mac, which sharply reduced the value of their stocks, investors fear that anything is possible.

"We've had the two biggest financial institutions in the country just taken over," said Steven Persky, head of Dalton Investments, a Los Angeles-based hedge fund firm. "The implication is that any financial institution is vulnerable."

Lehman and Bear Stearns were major players in the mortgage market. And after Bear was taken over by JPMorgan, Lehman was left as the smallest in the top tier of Wall Street's independent investment banks.

Seeking to calm frayed nerves, Lehman moved up its third-quarter earnings report to today from next week.

"It's fear of the unknown, and until they come out with something factual people are going to trade the unknown and come up with their own conclusions," said Robert Bolton, head trader at Mendon Capital Advisors in Rochester, N.Y.

Analysts expect Lehman to divulge another mammoth asset write-down to reflect a decline in the value of the company's holdings. Meredith Whitney, an analyst at Oppenheimer & Co., predicts a $4-billion write-off and a $2.70-a-share loss for the period.

Lehman's troubles extinguished the upbeat mood engendered by the government's takeover of Fannie and Freddie.

The Dow sagged 280.01 points, or 2.4%, to 11,230.73.

The Standard & Poor's 500 index gave up 43.28 points, or 3.4%, to 1,224.51. That was far bigger a move than its 2.1% gain Monday.

The Nasdaq composite index fell 59.95 points, or 2.6%, to 2,209.81.

The sell-off accelerated Tuesday despite what used to pass for good news: another sharp drop in commodity prices. Crude oil futures fell $3.08 to $103.26 a barrel, a five-month low.

Skittish investors rushed into the perceived safety of U.S. Treasury securities, driving the yield on the 10-year T-note to 3.57%, down from 3.68% late Monday and the lowest since mid-April.

Amid the gloom, there were a few positive signs.

The average yield on 30-year mortgage-backed bonds issued by Fannie Mae, which tumbled to 5.21% on Monday from 5.63% on Friday, fell further to 5.16% on Tuesday.

Such declines, if they hold up, could help to push down mortgage interest rates.

--

walter.hamilton@latimes.com

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