Bear Stearns replay? Lehman Bros. back in the rumor mill

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From Times staff writer Walter Hamilton:

Bear Stearns in winter. Lehman Bros. in spring?

The stock market was unnerved today by the prospect of investment banker Lehman collapsing the way Bear Stearns did in a matter of days in mid-March.

Lehman’s shares plummeted after rumors surfaced that it was borrowing emergency cash from the Federal Reserve to guard against the type of run-on-the-bank that torpedoed Bear Stearns.

The stock was down almost 15% around 11:30 a.m PDT as the rumors whistled through Wall Street trading desks. The stock partially recovered after Lehman denied it had turned to the Fed, but the shares still ended at a multiyear low, down $3.22, or 9.5%, to $30.61.

Analysts already had been expecting Lehman to report a large loss for the fiscal quarter ended May 31, and that the firm would be forced to raise another $4 billion or so to bolster its capital after heavy investment write-downs.

Ever since the stunning demise of Bear Stearns, the spotlight has been fixed on Lehman because of the inescapable similarities between the two companies. Both were bond powerhouses and major progenitors of mortgage-backed securities. They were the two smallest of the five major independent investment banks. And Lehman’s midtown-Manhattan headquarters are just a few blocks from Bear’s.

Lehman has gone to great lengths to fortify its balance sheet and play up its differences from Bear. Indeed, Lehman has done a much better job of diversifying its business lines and expanding geographically than Bear ever did.

Just a few weeks ago, with its stock rebounding to more than $47 a share, Lehman appeared to be getting past the concerns about its financial viability. But it has never quite been able to put them completely to rest.

Questions arose last month about whether the firm had adequately hedged its exposure to some risky assets. And a high-profile critic, hedge fund manager David Einhorn, contends that Lehman masked its exposure to troubled credit markets through debatable accounting maneuvers.

Many analysts expect Lehman to withstand these latest travails. Despite concerns, ‘We view Lehman as having adequate financial flexibility to work out its risk exposures over time,’ analyst Kathleen Shanley at research firm Gimme Credit wrote in a report today.

Still, combined with other unsettling financial-sector news in recent days, including the ouster of Wachovia Corp.’s CEO, investors are rethinking whether the credit-crunch-related woes of the banking sector are over, as many on Wall Street had been hoping.

‘We’ve gone from, ‘hey it’s the ninth inning’ to, ‘maybe it’s the fith inning’,’ said Kevin Kruszenski, director of trading at KeyBanc Capital Markets in Cleveland.