Lehman Shares Hit as Domino Speculation Grows

Lehman Brothers shares dropped more than 30 percent as Wall Street wondered whether the firm might be the next domino to fall in the banking meltdown.

Even as Moody's Investors Service affirmed its "A1" rating on the senior long-term debt of Lehman, traders dumped shares of the investment bank, after sending the stock down nearly 15 percent Friday.

As Moody's was affirming the debt rating it cut its outlook for Lehman from positive to stable.

"Rising illiquidity across financial markets has resulted in asset concentrations on Lehman's balance sheet that have proven to be somewhat larger than optimal for the firm," Moody's Senior Vice President Blaine Frantz said.

The move on Lehman's came a day after JP Morgan Chase announced it was buying venerable investment bank Bear Stearns for the seemingly bargain-basement price of $2 a share. While there were no immediate signs that Lehman was next on the auction block, traders obviously were concerned about the firm's future.

"I don't think it happens at Lehman Brothers or any of the peers, but unfortunately I can't sit here and tell you that it won't," Jeffery Harte, managing director in equity research at Sandler O'Neill, told CNBC.

Frantz, meanwhile, voiced support for the Federal Reserve's move Friday to inject $200 billion of liquidity into the market as a positive step to help stem the credit collapse. He said Lehman's cash management and position remain "robust."

Moody's also said Lehman's has navigated "quite well to date" through the volatile and challenging financial markets. But it said Lehman's exposure to commercial and residential real estate, and to a lesser degree leveraged loans, will likely burden earnings at least for the next several quarters.

"The real question facing the group here is what's the second quarter going to be like, what's the third quarter going to be like," Harte said. "What's the environment going to be like? What are these guys going to do to generate revenues once we've got these marks behind us?"

In another development Lehman and Singapore's DBS Group Holdings said they were still trading with one another, despite market rumors to the contrary.

"We are doing business with DBS... They continue to deal with us and we just executed a NZ$20 million kiwi FX trade with them," Lehman spokesman Matthew Russell said in response to queries from Reuters. "It's business as usual."

The comments followed market rumors that DBS had stopped dealing with Lehman and Bear Stearns  on concerns that transactions might not be settled.

-- The Associated Press contributed to this report.

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