What Rescue? Lehman's Stocks Plunge After the Bank Announced Its Survival Strategy

Stocks for ailing investment bank Lehman Brothers plunged again today as Wall Street showed its dissatisfaction with the company's newly unveiled rescue plan.

By the late morning, shares of Lehman Brothers Holdings dropped some 35 percent to below $5 a share. Since the start of the year, the stock has plummeted more than 90 percent after months of heavy losses related to the mortgage crisis.

The continuing drop in Lehman's share price has shown investors are still worried that Lehman might not be able to save itself from failure, said Douglas McIntyre, the editor of the financial Web site 247WallSt.com.

"People are looking at what Lehman did -- spinning off a dangerous part of their business, selling a majority in their money management firm -- that's a lot of fairly good stuff," McIntyre said. "But the market is saying it isn't enough. The mortgage market and the derivative market is so bad that even if you do all that, there's still a lot of risk."

But McIntyre said that uncertainty remains about whether Lehman will be able to follow through on its plans, including whether it will be able to secure a buyer for its investment management division and whether the ultimate sale price will be high enough to bolster Lehman's balance sheet.

With concerns about the firm growing in recent days, Lehman Brothers released its third-quarter earnings report a week early -- it posted a $3.9 billion loss -- and announced a plan to spin off much of its troubled real estate portfolio into a new company and also sell a majority stake in its investment management division, including Neuberger Berman, a profitable division of Lehman that manages mutual funds and private wealth.

In addition, the company said it was in talks with BlackRock Financial Management Inc. to sell about $4 billion of its United Kingdom residential mortgage portfolio.

Despite the announcement, Sean Egan of the credit rating company Egan Jones said he thought a government bailout of Lehman was still likely, despite the moral hazard -- the risk that companies will start making irresponsible decisions on the assumption that the government will save them should things go awry.

"In the struggle between moral hazard and market collapse, the fear of market collapse is too high," Egan said.

But not everyone agreed 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 unstable. 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 would not be as necessary.

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

Still some see an upside to the Lehman bailout plan. Isolating its troubled real estate assets into a separate entity is a strategy some analysts have called a "good bank/bad bank" solution. The "bad bank" would hold the troubled assets.

"Fundamental accounting says you can't make the bad assets disappear -- they have to wind up somewhere," said Lawrence J. White, an economics professor at New York University's Stern School of Business.

The move, he said, could give Lehman some "organizational gains" by allowing the new company -- Real Estate Investments Global -- to focus squarely on making the most of its ailing portfolio.

White said that Lehman's sale of the stake in its investment management division could help the bank provide capital for the spin-off.

"It provides the net worth so as to allow it to be a feasible transaction," he said.

White said that if Lehman didn't resolve its asset problems, the government could 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.

ABC News' Zunaira Zaki contributed to this report.

ABC News' Zunaira Zaki contributed to this report.