Investment giant Lehman Brothers and other US banks are being roiled by falling confidence in the banking sector, spurred in part by hefty mortgage-related losses, analysts said.
Lehman Brothers has lost hundreds of millions of dollars tied to mortgage investments, but it has also been fighting bogus rumors about its financial standing for weeks.
The rumor mill has kicked into a higher gear since the near-collapse in March of rival bank Bear Stearns, which was taken over by JPMorgan Chase in an eleventh hour government-backed deal.
Lehman’s shares closed down 14 percent to US$12.40 on Monday. Its stock has tumbled heavily in the past week and dived about 80 percent from its high this year, struck in early February, of US$66.
The storied Wall Street finance house’s shares have now tumbled to their lowest levels since the bank went public in 1994 with a US$16 share price.
The sharp fall in the shares of two mortgage-finance giants, Fannie Mae and Freddie Mac, in the past week has added to investors’ unease about banks and finance firms exposed to the ailing multitrillion-dollar US mortgage market.
“Will the Fed’s ‘bailout’ of Fannie and Freddie stop the bleeding in thrifts and mortgage finance? Maybe so, but this industry is looking more like a government-issued lottery ticket than an investment,” said Ed Yardeni, chief investment stategist at Yardeni Research.
The US Treasury and the Federal Reserve unveiled measures over the weekend aimed at shoring up Fannie Mae and Freddie Mac’s finances.
Other banks aside from Lehman have also been buffeted by a credit squeeze that erupted last summer.
California-based IndyMac bank was taken over by federal banking regulators over the weekend as it fell into insolvency. Television pictures on Monday showed depositors lining up to withdraw their savings from the bank.
IndyMac had announced 3,800 jobs cuts a week ago, saying it was struggling to raise fresh capital.
IndyMac’s demise occured after Wachovia, another major banking group, warned investors last week that second-quarter losses could reach US$2.8 billion as loan and property-related losses continue to ravage its finances.
Shares in two other banks, Washington Mutual and National City, took a heavy beating on Monday, closing down 35 percent at US$3.23 and 15 percent lower at US$3.77 respectively.
Washington Mutual, the country’s largest savings and loan bank, issued a statement saying it was “well capitalized” and National City said it was “experiencing no unusual depositor or creditor activity,” saying it was financially sound.
Attention has remained focused on Lehman though, because it is one of the US’ largest investment banks.
“About one-third of its assets are not very liquid and virtually impossible to value, if the bank had to sell them quickly, those assets could lose value,” Gregori Volokhine, at Meeschaert Capital Markets, said of Lehman.
Some analysts have said that Bear Stearns’ near-demise was caused in part when counterparties stopped doing business with the bank fearing it was struggling to honor its financial commitments.
Fresh rumors swept across trading floors last week, one of which suggested that the giant bond fund PIMCO had stopped trading with Lehman, but this rumor was swiftly dismissed by the bond fund as untrue.
Other rumors about Lehman have also proven to be bogus.
Market talk swirled last month that the bank had tapped a special Fed lending facility, but this was also untrue.
The Securities and Exchange Commission appeared to step aggressively into the breach over the weekend, announcing that it intended to crack down on the spread of market rumors aimed at manipulating stock prices.
Lehman’s shares have also fallen in the wake of its announcement in the middle of last month of a second-quarter loss of US$2.8 billion — the first such loss since it listed.
To reassure the market, Lehman subsequently announced last month that it had successfully closed two special share offerings that reaped US$6 billion in fresh capital.
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