That Lehman Thing Again!

Shares of Lehman Brothers (LEH.N: Quote, Profile, Research) fell by nearly 10 percent in early New York trading on Thursday on rumors that the fourth largest U.S. investment bank could see a run on the bank similar to what happened to Bear Stearns (BSC.N: Quote, Profile, Research), traders said.

Declines in Lehman's shares on Thursday are "all being tied to fears of Bear Stearns," said Robert Bolton, head trader for Mendon Capital Advisors in Rochester, New York. "Does another broker dealer go the route of Bear Stearns with regard to their solvency and the like."

A Lehman spokeswoman called the rumors "totally unfounded," which contributed to the stock taking back much of its losses.

Kerrie Cohen, a spokeswoman for Lehman Brothers, said, "There are a lot of rumors in the marketplace that are totally unfounded. We are suspicious that the rumors are being promulgated by short sellers of our stock that have an economic self interest."

At midday, Lehman shares were down 4.28 percent at $40.67 on the New York Stock Exchange, after falling as low as $38.36.

The U.K.'s Times reported on March 19 that the U.S. Securities and Exchange Commission (SEC) was probing whether hedge funds and other market players deliberately circulated false rumors about Lehman Brothers to push the company's shares lower.

Investors have been skittish about investment banking shares since the middle of the month when Bear Stearns Cos Inc experienced a run on the bank amid fears that its mortgage exposure could leave it insolvent.

Other traders, who declined to be identified, echoed Bolton's assessment for the reason behind the drop in Lehman's shares. In addition, large bearish bets on Lehman in options markets contributed to selling pressure, some traders said.

Lou Brien, a strategist with DRW Trading Group in Chicago, said there had been a rumor on Thursday that Lehman was close to making an announcement, which contributed to the shares selling off, but the announcement proved to be about the bank hiring a new co-head of global institutional distribution, after which shares recovered.

Lehman Brothers a decade ago derived an outsized proportion of its earnings from the U.S. bond market and has long been an active player in mortgages, leading some investors to argue the company could be devastated by the credit crisis. But Lehman's business is much more diversified than it was in the 1990s, and the company has not posted any net losses during the credit crunch.

Since Bear was forced to announce plans to sell itself to JPMorgan Chase & Co on March 16, the Federal Reserve has allowed investment banks to borrow directly from the central bank, in a move designed to shore up the financial system.

In an e-mailed statement on March 17, Lehman Chief Executive Dick Fuld said the Fed's creation of a liquidity facility for primary dealers "from my perspective, takes the liquidity issue for the entire industry off the table."

Lehman said on March 18 that its holding company has $34 billion of assets it could easily sell, and another $64 billion of assets it could borrow against. Regulated subsidiaries have another $99 billion of assets it could borrow against.