Shares in Lehman Brothers plunged 44.95 percent, leading the markets in retreat on Tuesday, as efforts by the beleaguered investment bank to raise fresh capital appeared to falter, raising questions about the firm’s ability to survive.
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Fannie Mae and Freddie Mac, drove the Dow up 289.78 points. Tuesday’s declines suggested that the Fannie and Freddie bailout — one of the largest in American history — had already been absorbed by investors, who may have anticipated the action since the Treasury Department first put it on the table back in July. and , drove the Dow up 289.78 points. Tuesday’s declines suggested that the Fannie and Freddie bailout — one of the largest in American history — had already been absorbed by investors, who may have anticipated the action since the Treasury Department first put it on the table back in July.
Now, investors are looking ahead to what is expected to be a painful earnings season for banks and lenders. Wall Street will weigh the relative stability that has now entered the mortgage market against concerns that the banking world will be rocked by bailout similar to one earlier for Bear Stearns.
Lehman, which has been besieged by rumors and speculation for months, declined to comment Tuesday on reports that talks with the Korean bank had failed. K.D.B. has also not commented. But people close to the matter have said for some time that a deal with K.D.B. remained unlikely though not impossible. A Korean regulator said last week that K.D.B. should be cautious in making any deal with Lehman, which continues to have large exposures to troubled commercial and residential real estate assets.
Lehman has been pursuing several other avenues to raise capital and ease the burden of its troubled assets. The bank has been shopping its prized investment management division, which includes Neuberger Berman, but has not yet received the price of about $6 billion that it is said to be seeking.
People with knowledge of the auction say Lehman has asked for final bids to be submitted by this weekend. Two private equity groups — Kohlberg Kravis Roberts and Hellman & Friedman — are still interested in the division. Others like the Carlyle Group showed initial interest but were not willing to pay Lehman’s asking price, people close to the matter said.
If Lehman does not receive the price it wants, it could hold onto the investment management unit, spin it off in an initial public offering or sell a piece of it.
Lehman has also been discussing a spin-off of about $30 billion in troubled commercial real estate assets into a separate holding company that would be owned by Lehman shareholders and be financed by debt and equity from the bank.
None of the various options have materialized fast enough to appease nervous Lehman shareholders, however, who expect the bank to post a large loss and further big write-downs in the third quarter.
Lehman said that it would discuss key strategic initiatives on Wednesday morning, but analysts said the bank might be running out of time.
Richard X. Bove, analyst at Ladenburg Thalmann, wrote in a note to clients that Lehman had thus far “failed to construct any positive deal concerning Neuberger Berman, its good bank/bad bank thesis, the sale of its commercial real estate properties, and/or the adjustment in other asset values. Clearly the company does not believe that it has a serious balance sheet problem, and it simply refuses to take what it believes are fire sale prices for its key assets.”
Lehman has been under heavy pressure since the collapse of Bear Stearns, as investors believe its heavy reliance on mortgage-related underwriting and trading could lead it to suffer the same fate that forced Bear into an emergency sale to JPMorgan Chase.
Lehman has steadfastly said that its balance sheet remained much stronger than Bear’s ever was and that it continued to have access to an emergency lending facility put in place by the Federal Reserve after Bear’s near collapse.
The chief executive, Richard S. Fuld Jr ., has said this lending facility should take any question of Lehman facing a liquidity crisis “off the table.”
The bank’s shares have nonetheless sunk more than 80 percent this year. They fell $6.36 to $7.79 on Tuesday.
The woes at Lehman helped to drag down the entire financial sector, with Merrill Lynch losing 10.2 percent, or $2.83, to $24.76, and American International Group , the insurance company and a Dow component, tumbling 9.7 percent, or $4.39 to $18.37 .
Other bank stocks also declined. Citigroup fell $1.44, or 7.09 percent, to $18.88, while Morgan Stanley fell $2.87, or 6.63 percent, to $40.40. But Fannie Mae rose 26 cents, or 36 percent, to 99 cents, while Freddie Mac was unchanged at 88 cents.
Oil prices took a sharp dive on Tuesday, losing more than $3 to settle at $103.26 a barrel. While good news for consumers and the economy, it translated to more pain in the stock market. Shares of energy companies fell nearly as much as financials, with Exxon Mobil stock losing 4.6 percent.
Michael Grynbaum contributed reporting.