Lehman shares drop as Wall Street questions survival

Lehman Brothers shares lost about 40 percent on Thursday as Wall Street questioned whether the investment bank will survive because of its failure to sell assets to cover losses from toxic real estate investments.

In early trade, the stock was recently down $2.92, or 40 percent, at $4.32 as analysts voiced doubts about the bank's survival plan, laid out on Wednesday by Chief Executive Dick Fuld.

The shares have lost about 76 percent since Monday and are down 94 percent from their 52-week high of $67.73.

Other financial stocks have fallen sharply in the past week and continued to struggle on Thursday morning. Investment firm Merrill Lynch shares fell 14 percent to $20.00, insurer AIG was down 9.5 percent at $15.84 and Washington Mutual fell 14 percent to $2.00.

But Lehman -- founded in 1850 by three German immigrants who traded cotton -- garnered the most attention on Thursday.

"As much as they try to calm people down or calm investors down, investors don't have yet the answers they need," said Rose Grant, managing director of Eastern Investment Advisors in Boston. "There's a complete lack of faith, lack of confidence, and lack of trust."

Lehman announced a record quarterly loss of $3.9 billion on Wednesday, and said it would spin off distressed assets and sell a stake in its asset management business.

On Thursday, a string of analysts from banks including JPMorgan, Wachovia, Goldman Sachs and Citigroup widened loss estimates and cut price targets for Lehman Brothers.

We thought getting news out of Lehman was going to clear the dark cloud but it really doesn't. It just leaves us with a company that's limping along, that may or may not make it," said Arthur Hogan, chief market analyst at Jefferies & Co in Boston.

The company has written down billions of dollars of assets during the last year, largely holdings of complex mortgage-backed securities. And over the last several months, the bank has been battling rumors of defecting clients and talk of a takeover at a fire sale price.

"It's unfortunate that we're in the kind of position now where events can take over. The stock is telling us that Dick Fuld is running out of options," said Michael Holland, founder, Holland & Co, which oversees more than $4 billion of investments. "Unfortunately for Fuld, who has been very adamant about keeping Lehman independent, he has to find a partner now, someone to acquire them."

Lehman's survival may hinge on the sale of a 55 percent stake in its asset management business, Neuberger Berman. But not everyone is confident a deal will be consummated.

"We are not even sure that the auction process for 55 percent of their asset management group is going to work because the people that win the auction need to find the money to buy it," Hogan said.

The Lehman worries were not just affecting the stock. Its credit protection costs soared to a record and some of its bonds traded near distressed levels.

Lehman bond prices fell, with bonds offering yields of 10 percent or more, an indication traders now view the debt as high-yield or even distressed.

Five-year credit default swaps traded at 768 basis points on Thursday, or $768,000 a year to protect $10 million of debt, widening 188 basis points from Wednesday's close, according to CMA DataVision.