Lehman Tumbles On Rumors, Credit Concerns

It's a bad day to wear the label of "next Bear Stearns," which means that it's been a bad few days for Lehman Brothers Holdings Inc. (LEH) -- the fourth-largest U.S. securities firm has seen its shares battered as credit concerns moved to the forefront for investors and shares of government-sponsored housing giants Fannie Mae (FNM) and Freddie Mac (FRE) have tanked. As is wont for a firm seen by investors as vulnerable -- and one that has nearly 15 percent of its outstanding share float in a short position -- rumors have a way of emerging to tank stock prices. The latest false rumor emerged Thursday, with a rumor that bond giant PIMCO had ceased trading with Lehman. PIMCO manager Bill Gross quickly quashed the rumor, but the damage was done: Lehman closed off 12 percent $17.30 Thursday. Shares resumed their slide further on Friday, and were off 18.5 percent to $14.10 as of 11:01am EST. Friday's slide, however, appears to be tied moreso to the same sort of credit concerns that have battered Fannie and Freddie; questions remain over Lehman's large exposure to mortgages, and what that exposure will mean for capital at the firm. In a filing with the Securities and Exchange Commission late Thursday, Lehman said that its so-called Level 3 assets -- those most difficult to value -- actually rose relative to overall assets, from 6.1 percent in November of last year to 6.5 percent at the end of May of this year. The dollar value assigned to Level 3 assets fell slightly, from $42 billion to $41.3 billion; $20.6 billion of that total was in the form of MBS/ABS, Lehman said, the largest chunk of Level 3 assets valued. MBS and ABS assets remain dominant on Lehman's overall book, valued at $72.5 billion of the company's $248.7 billion in total assets at the end of May; the second-largest asset category is the firm's corporate debt, by comparison, which represents $50 billion. The firm's relatively larger exposure to mortgages is what has investors increasingly concerned about future earnings and whether a recent $6 billion capital raise will be enough to weather the credit storm. Not surprisingly, Lehman has been moving in recent months to lessen its residential mortgage exposure in the US; it reduced its net residential mortgage exposure from $31.8 billion to $24.9 billion during Q1. A review of financial data by Housing Wire shows that the majority of that drop was the result of selling positions in prime and Alt-A mortgages off of its books (see earlier report). Concerns over mortgage exposure and mounting losses led the cost to insure Lehman's debt against default to surge on Friday, Reuters reported. Citing data from Phoenix Partners Group, Reuters said that credit default swaps on Lehman debt had widened 55 basis points to 380 basis points, or $380,000 per year for five years to insure $10 million in debt. Disclosure: The author was long FRE, and held no positions in FNM or LEH when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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