Lehman Takes `Pounding' Again as Speculation Drags Down Shares

By Yalman Onaran

July 11 (Bloomberg) -- Lehman Brothers Holdings Inc., the securities firm that lost almost 75 percent of its market value this year, sank to the lowest since 2000 in New York trading as customers' votes of confidence failed to halt speculation that the stock may drop further.

Lehman, once the biggest U.S. underwriter of mortgage bonds, fell $2.44, or 12 percent, to $17.30 in New York Stock Exchange composite trading yesterday. Shares of the New York- based investment bank lost 22 percent in the last two days.

Yesterday's speculation centered on two clients backing away from the firm. Pacific Investment Management Co., manager of the world's biggest bond fund, and hedge fund SAC Capital Advisors LLC both said publicly that they continued to do business with the company. Pimco fund manager Bill Gross said in an interview with CNBC that there's ``no question'' about the firm's solvency.

Pimco and SAC's endorsements were overwhelmed as Lehman, led by Chief Executive Officer Richard Fuld, dropped alongside home-loan financing companies Fannie Mae and Freddie Mac. Both face pressure to raise more capital amid a credit contraction that has saddled banks with $408 billion of writedowns. Lehman has taken a ``pounding'' from traders betting the shares will drop since rival Bear Stearns Cos. collapsed in March, according to Richard Bove, an analyst at Ladenburg Thalmann & Co.

``People are worried about Fannie and Freddie, Lehman falls; people aren't worried about them, Lehman falls again,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. ``This is one where you scratch your head and ask `what's going on?' It's fear and over-reaction.''

`Concentrated Effort'

Fuld, 62, declined to comment through a firm spokesman.

Short-sellers, who borrow shares betting that they'll decline, are spreading rumors about the bank in an organized attempt to depress the stock, according to Bove.

``There's a concentrated effort to break Lehman,'' Bove said. `` And I can't say it won't work because it worked with Bear.''

Similar speculation may have contributed to the demise of Bear Stearns when clients and creditors stopped doing business with the firm. The Federal Reserve has since allowed brokers to borrow from the central bank, as commercial lenders do. Since Bear Stearns's failure and takeover by JPMorgan Chase & Co. in March, Lehman has boosted its cash holdings and reduced dependence on short-term funding.

U.S. Representative Paul Kanjorski, a Democrat from Pennsylvania, said he wasn't convinced the sinking share prices resulted from wrongdoing.

`Disrupt the Balance'

``There are winners and losers in the market,'' said Kanjorski, chairman of the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. ``We've got to be very careful not to disrupt that balance because if we do we're effectively destroying the market.''

Freddie Mac shares dropped 22 percent yesterday to $8, extending its drop in two days to 41 percent. Fannie Mae has sunk 25 percent in the last two days.

The cost of protecting debt sold by Lehman Brothers from default rose to the highest in almost four months, according to traders of credit-default swaps.

Contracts on the New York-based broker jumped 40 basis points to 325 yesterday, according to Phoenix Partners Group in New York. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.