Lehman Shares Drop as Wall Street Questions Survival

NEW YORK (Reuters) – Lehman Brothers shares lost about 40 percent on Thursday as Wall Street questioned whether the investment bank will survive because of its failure to sell assets to cover losses from toxic real estate investments.

In early trade, the stock was recently down $2.92, or 40 percent, at $4.32 as analysts voiced doubts about the bank’s survival plan, laid out on Wednesday by Chief Executive Dick Fuld.

The shares have lost about 76 percent since Monday and are down 94 percent from their 52-week high of $67.73.

Other financial stocks have fallen sharply in the past week and continued to struggle on Thursday morning. Investment firm Merrill Lynch shares fell 14 percent to $20.00, insurer AIG was down 9.5 percent at $15.84 and Washington Mutual fell 14 percent to $2.00.

But Lehman — founded in 1850 by three German immigrants who traded cotton — garnered the most attention on Thursday.

“As much as they try to calm people down or calm investors down, investors don’t have yet the answers they need,” said Rose Grant, managing director of Eastern Investment Advisors in Boston. “There’s a complete lack of faith, lack of confidence, and lack of trust.”

Lehman announced a record quarterly loss of $3.9 billion on Wednesday, and said it would spin off distressed assets and sell a stake in its asset management business.

On Thursday, a string of analysts from banks including JPMorgan, Wachovia, Goldman Sachs and Citigroup widened loss estimates and cut price targets for Lehman Brothers.

“We thought getting news out of Lehman was going to clear the dark cloud but it really doesn’t. It just leaves us with a company that’s limping along, that may or may not make it,” said Arthur Hogan, chief market analyst at Jefferies & Co in Boston.

The company has written down billions of dollars of assets during the last year, largely holdings of complex mortgage-backed securities. And over the last several months, the bank has been battling rumors of defecting clients and talk of a takeover at a fire sale price.

“It’s unfortunate that we’re in the kind of position now where events can take over. The stock is telling us that Dick Fuld is running out of options,” said Michael Holland, founder, Holland & Co, which oversees more than $4 billion of investments. “Unfortunately for Fuld, who has been very adamant about keeping Lehman independent, he has to find a partner now, someone to acquire them.”

Lehman’s survival may hinge on the sale of a 55 percent stake in its asset management business, Neuberger Berman. But not everyone is confident a deal will be consummated.

“We are not even sure that the auction process for 55 percent of their asset management group is going to work because the people that win the auction need to find the money to buy it,” Hogan said.

The Lehman worries were not just affecting the stock. Its credit protection costs soared to a record and some of its bonds traded near distressed levels.

Lehman bond prices fell, with bonds offering yields of 10 percent or more, an indication traders now view the debt as high-yield or even distressed.

Five-year credit default swaps traded at 768 basis points on Thursday, or $768,000 a year to protect $10 million of debt, widening 188 basis points from Wednesday’s close, according to CMA DataVision.

WHITHER FULD?

Lehman’s growing problems have led to questions about CEO Fuld and the strategy he has laid out to get the firm on more solid footing.

“What you have is a loss of confidence in management and they’ve got to start doing things instead of saying they’re going to do things.” said William Smith, president of Smith Asset Management Inc, in New York. “I’m in shock as to how Fuld let this get away from him. From what I understand the guy was a great executive for three decades.”

Fuld won a reputation as a survivor and top-notch leader since coming to Lehman as a trader 30 year ago. He endured in-fighting that led to the firm’s sale to Shearson/American Express in 1984 and was running Lehman when it was spun off — undervalued and unwanted — in 1994.

Nicknamed “the gorilla” for his intimidating presence, Fuld was considered one of Wall Street’s ablest CEOs.

ANALYSTS’ CALLS

Goldman Sachs downgraded Lehman to “neutral” from “buy” and removed it from its Americas buy list on Thursday.

“Management did not successfully put to rest the issues that had been pressuring the stock,” William Tanona of Goldman Sachs wrote.

Oppenheimer’s Meredith Whitney said Lehman’s initiatives were a “step in the right direction,” but she continued to expect a tough 2008 for the investment bank.

Lehman faces challenges to earnings given difficult capital markets for the next several quarters and potential write-downs of its remaining risk exposures, Whitney wrote in a note dated September 10.

She expects Lehman to break even for the fourth quarter, down from her prior view of a profit of 36 cents a share. For 2008, she widened her loss estimate to $10.24 a share from $6.67.

By Patrick M. Fitzgibbons

(Reporting by Joseph Giannone, Jonathan Spicer, Elinor Comlay, Sweta Singh, Juan Lagorio, Dan Wilchins, Walden Siew and Ellis Mnyandu; Editing by Steve Orlofsky)