Lehman Under "Domino Theory" Pressure

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Lehman Brothers led the pack of financial stocks downward this morning, falling to six-year low as investors speculated that the firm might be vulnerable to a run-on-the bank similar to the one that brought down Bear Stearns. This worry continues despite Lehman having announced a new 3-year credit facility of $2 billion dollars and the Federal Reserve opening up the discount window to brokerages houses, a move many regard as specifically aimed at providing liquidity to avoid the fears that fueled the collapse of Bear.
But the pressure on Lehman’s stock continues. Lehman is leveraged more heavily than its Wall Street peers and it is a major player in the mortgage market, the source of much of the pain for Bear Stearns. It recently completed a round of 10% across-the-board layoffs, a move intended to show capital markets that the bank is serious about improving efficiency and cutting costs.
Lehman has yet to report any truly bad news . Its write-offs on the last two quarters of 2007 added up to about $1.6 billion, far below the write-off numbers of some of its peers. But this has ironically fueled market fears—many wonder if Lehman has more exposure than it has let on. Lehman chief executive Dick Fuld has attempted to reassure investors and employees. But the Wall Street Journal’s headline—Lehman Says Liquidity Is Fine—only served to remind investors of similar assurances from Bear last week.
More after the jump.


Lehman Brothers releases their next quarterly earnings report on Tuesday. Although the Federal Reserve has shown a readiness to rescue troubled financial institutions, many wonder whether there is another financial player who would be willing to play the role JP Morgan Chase played with Bear Stearns. What’s more, the near wipe-out of Bear Stearns investors has shown that the government is willing to let shareholders bear the brunt of a Wall Street firm’s collapse while bailing out creditors, customers and counterparties.
The options trading is heavily favoring trouble ahead for Lehman. Option traders were buying more than three-times the number of puts than calls, a sign that traders expect the value of Lehman shares to fall, Rebecca Engmann Darst said on CNBC.
"Option traders keen for protection have bid up the price of the April 10.00 put, which conveys the right to sell Lehman shares at $10 a piece by April’s expiration, to $1.65, despite the fact that the market only assigns about a 3 percent probability of the strike landing in the money by that time," Darst said.
On a side note, we’re totally crushing out on Rebecca Darst these days. She’s bright, sharp and her machine-gun fire on-air delivery is impressive. Also, she’s seriously hot. Open letter to CNBC: Please give us more of her. You began Squawk Box an hour early this morning. Let’s make that a regular thing, but focus it on options markets. How about “Waking Up With Rebecca Darst” for an hour each morning? On second thought, that would mean she’ll never accept our invitation to have drinks with us since she’ll have to wake up so early every morning. Scratch the whole thought.

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