Lehman Brothers denied market rumors that it is going to take a writedown related to subprime exposure. The rumor dented stock prices and spurred buying in Treasurys, traders said.
"The rumors regarding subprime exposure are totally unfounded," a Lehman spokeswoman said. Rumors have been circulating since mid-morning that Lehman specifically, and brokers and banks in general, will soon be revealing that they will have losses related to sub prime.
The latest round of worrying and rumor mongering follows Bear Stearns disclosure last night that one if its problem hedge funds is worthless and the other is worth less than a tenth of its value.
Despite the denial, stocks continued to decline and selling was particularly harsh in the brokerage group. Lehman, GoldmanSachs, Merrill Lynch and Morgan Stanley were all lower. Bear Stearns was particularly hard-hit.
Hit by a Rumor
The possibility of brokerages being hurt by the subprime mortgage lending industry came to the fore in June, when Bear Stearns revealed that two of its hedge funds were faltering as a result of exposure to the troubled subprime market.
Bear Stearns confirmed it will bail out one of its troubled hedge funds with $3.2 billion in secured loans, but the Wall Street firm sought to convince the broader market its troubles are "relatively contained."
This week Bear Stearns revealed that the value of the two hedge funds has been largely wiped out.