Lehman shares plunge amid market distress

By Dan Wilchins and Jennifer Ablan

NEW YORK (Reuters) - Shares of Lehman Brothers plunged to nine-year lows and stock in other Wall Street firms declined as new signs of distress in financial markets spooked investors.

Lehman fell as much as 23 percent, before recovering to close down 16.6 percent on Friday, far outpacing the drop in rivals such as Merrill Lynch & Co , which lost 3.8 percent and Goldman Sachs Group Inc , which declined 4.5 percent.

In the last two weeks, Lehman has lost about a third of its market value, and the company's shares now trade at less than half their book value, or the net accounting value of its assets, which typically signals extreme distress.

The investment bank has been the subject of false rumors in the past, and the U.S. Securities and Exchange Commission is investigating whether investors have looked to profit by spreading rumors to push down the company's shares.

On Thursday, its shares were battered by rumors -- later discredited -- that some key customers, Pimco and SAC Capital, had pulled business away from it. Pimco, the world's biggest bond fund, said on Thursday it continued to trade normally with Lehman as did SAC, a prominent hedge fund.

Standard & Poor's on Friday refuted negative speculation, saying Lehman appears to have "sound credit fundamentals."

"The persistent and ongoing pressure on Lehman's stock price in recent days has not had negative effects on Lehman's liquidity, funding or client business," said S&P, affirming its "A/Negative/A-1" rating on the stock.

On June 30, Lehman's shares dropped on rumors that it was going to be bought out at a price below its then market price. Again, the rumors could not in any way be substantiated.
The U.S. stock market fell on Friday, largely because of fears that the U.S. housing crisis would drag down the nation's major mortgage finance agencies, Freddie Mac and Fannie Mae , and because the government offered no hint that it would step in swiftly to help.

Around the time Bear Stearns collapsed, the Federal Reserve opened backup financing lines for Wall Street, which should prevent a major investment bank from failing overnight.

But even with the ability to borrow against assets at the Federal Reserve, Lehman could run into trouble, said James Ellman, president at hedge fund Seacliff Capital in San Francisco, which has about $200 million under management. He said Seacliff does not have a position in Lehman.

"They can walk all the assets they want to the Fed, but clients can still take funds elsewhere, and if enough clients decide to remove their business, that brokerage likely does not survive long-term," Ellman said.

Bear Stearns, once the fifth-largest U.S. investment bank, faced a run on the bank in March, and was forced to sell itself.

"People think Lehman will be acquired by someone at below its current share price. Just look at what happened with Bear Stearns," said Jim Huguet, co-chief executive at fund manager Great Companies, which manages $300 million. Great Companies does not have a position in Lehman.

It is extremely difficult to know the market value of the mortgages, real estate, and related securities that are valued on Lehman's books at around $60 billion, experts said.

Huguet said that it was difficult for Lehman given the ferociousness of short sellers.

"Everybody is totally negative on financial stocks, and until housing prices stabilize, and people feel like there is liquidity for these firms, the market will continue to take them down. It's interesting the way the shorts have gotten -- it's almost like a group of piranhas. Something in the water is hurt, and all of the sudden it has 10,000 piranhas on it."
Lehman spokeswoman Kerrie Cohen declined to comment.

Lehman's shares closed down $2.87, or 16.6 percent, at $14.43 on Friday. Earlier, they touched a low of $13.29, their lowest level since 1999.

(Reporting by Dan Wilchins; Editing by Toni Reinhold and Carol Bishopric)