Is Lehman Next?

Lehman Brothers has plunged over the past few days as Wall Street is speculating if it is the next Bear Stearns. The bank has fought these allegations with a string of press releases and appearances stating that it is properly capitalized and reducing debt. (Wait a minute, this sounds familiar – didn’t Bear do the same thing).

A string of major articles outlining Lehman’s woes has not helped the situation. The Wall Street Journal stating that the bank’s “balance-sheet troubles threaten to harm the wider financial system unless the bank takes decisive action”. The paper went on to say the firm will be forced to sell all or parts of itself to stay above water. Naturally this news has LEH stock targeting 52 week lows.

Lehman’s has not taken the press sitting down; it has come out swinging at parties that portray the bank in a negative light. At the top of the list is head fund chief, David Einhorn, who runs a $6 billion hedge fund called Greenlight Capital. (Lehman Battles an Insurgent Investor). He has been a vocal critic of Lehman’s and has profited on their pain by shorting the stock. According to most market watchers, “Mr. Einhorn instigated the latest dive in Lehman’s stock price two weeks ago when he encouraged other investors to short the stock at a large conference in New York”. He followed this up by agitating for a reduction in debt ratings for Lehman Brothers.

The firm is trying to portray Mr. Einhorn as a short-seller who is simply trying to pad is pocket by spreading negative news about Lehmans. Many on Wall Street simply point to the many times he has been correct in the past. In any account, the situation will play itself out over the next few weeks. It is unwise to underestimate the headwinds facing Lehman Brothers, their eroding mortgage portfolio represents a systemic risk not only to themselves but other Wall Street firms. The media is most likely right on target when stating that a merger is needed and the bank is at serious risk.

The question remains of how much LEH will sink below $31 in the next couple of months. Will the firm regain investor confidence or is it doomed for a big fall?