Last updated: September 10, 2008 9:32 am

Lehman Brothers

A Fuld and his money lehman lex

Blink and you missed it. The rally in financial stocks is over – most notably for Lehman Brothers. The investment bank has lost almost $6bn, or more than half, of its market value in the two days since the US government attempted to ease financial strains with the bail-out of Fannie Mae and Freddie Mac. Trading in the single digits, the beleaguered bank is testing the patience of investors who are now repeatedly pummelling its share price.

That the catalyst for Tuesday’s slide was – again – reports that talks with Korea Development Bank had ended is a concern. An investment by the domestically-focused, state-owned institution always looked to be a long shot. The bank’s management reshuffle, announced as the bailout of the mortgage financiers arrived, also riled investors. With news of a capital injection hotly anticipated, another change at the top of the bank’s fixed income division, after only seven months, smacked of a management divorced from the realities of its environment.

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Yet there is little reason – for now – to believe Lehman is destined to go the way of Bear Stearns – even though the cost of insuring against default yesterday jumped by nearly 150 basis points. The bank has raised almost $12bn in new equity this year, more than double its current market capitalisation. It retains value through its prominence in fixed income. Most importantly, unlike Bear, it already has the authorities standing behind it, through its access to the Federal Reserve’s funding window.

Uncertainty, though, is building to agonising levels ahead of the investment bank’s third quarter earnings release, due on Wednesday. Standard & Poor’s on Tuesday heaped on more pressure, noting that the precipitous falls in the bank’s share price would heighten doubts over its ability to raise further capital. Lehman now will have to make uncomfortable sacrifices. Regulators, meanwhile, have no time to pause for breath. Lehman looks in danger of ruining Fannie and Freddie’s going-out parade.

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