First Bear, Then Fannie and Freddie ... Is Lehman Next?

Sept. 9, 2008 — -- Worries about another major investment bank failure escalated Tuesday as shares in Lehman Brothers, the country's fourth largest brokerage firm, plummeted more than 40 percent.

Concerns about Lehman helped erase most of the rebound that Wall Street saw on Monday, after the Dow Jones industrial average surged more than 289 points on news that the federal government was bailing out ailing mortgage giants Fannie Mae and Freddie Mac.

On Tuesday, the Dow plunged some 280 points while the share price for Lehman Brothers Holdings Inc. dropped below $8 as investors worried about whether Lehman would be able to cover the losses it continues to sustain from its mortgage holdings.

"There's a strong suspicion in the marketplace that a lot of their assets, which are related to residential and commercial mortgages, are not worth what they're being carried on the balance sheet for," said Lawrence J. White, an economics professor at New York University's Stern School of Business. "One of these days, Lehman is going to have to recognize that."

White said that if Lehman doesn't resolve its asset problems, the government might eventually step in to shore up the bank like it did Bear Stearns. In March, the failing investment bank was purchased by JP Morgan in a $240 million deal backed by the federal government.

A Lehman spokesman declined to comment.

Lehman this year posted a second-quarter loss of nearly $3 billion. Analysts expect to see the bank report more losses when it releases its third-quarter earnings report next week.

But not everyone agrees that Lehman could be subject to a Bear Stearns-style treatment. Bear's bailout happened under "very narrow circumstances," said Peter Wallison, a senior fellow at the American Enterprise Institute, a conservative think tank.

At the time of the Bear Stearns rescue, he said, many major financial institutions were considered to be instable. If the government hadn't intervened and Bear Stearns had been allowed to fail, he said, there would have been a run on banks around the world.

Since then, Wallison said, financial institutions have made adjustments that would allow them to weather another bank failure. If Lehman did fail, he said, the same kind of domino effect would be unlikely and government intervention wouldn't be as necessary.

"I don't see a real danger in the same kind of panicky run on financial institutions," he said.