Lehman Shares Hit as Domino Speculation Grows

Lehman Brothers shares fell to a six-year low, leading the decline among financial stocks, as investors wondered whether the firm might be the next domino to fall in the banking meltdown.

The drop in Lehman's shares was accompanied by options activity that showed investors were perceiving heightened risk for Lehman's stock and an increased likelihood of a decline in its value.

Earlier Monday, CNBC learned Chief Executive Dick Fuld sought to calm Lehman employees by sending out an email telling them that the Fed's action to open its discount rate window to primary brokers has taken the liquidity issue "off the table for the entire industry."

However, investors clearly were not soothed by his words. Lehman has higher exposure to mortgages and mortgage-backed accounts than Bear Stearns.

According to Interactive Brokers, the implied volatility in Lehman's shares skyrocketed Monday, a sign that some investors are betting for a sharp change in the price of Lehman shares and heightened risk.

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, according to Rebecca Engmann Darst.

"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.

All this even as banking analysts suggested that there are significant differences between Bear Stearns and Lehman. (Click here for more expert opinion on Lehman.)

Analysts at Deutsche Bank sent an alert to their clients saying, "Lehman is not Bear."

They cited Lehman's higher levels of liquidity, the support it has from its counterparties, its higher level of diversification, and the experience of Lehman's CEO as reasons for its opinion.

Separately, Moody's Investors Service affirmed its "A1" rating on the senior long-term debt of Lehman, while cutting its outlook 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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