March 17 (Bloomberg) -- Lehman Brothers Holdings Inc. tumbled in New York trading as Chief Executive Officer Richard Fuld's comments aimed at soothing concerns about a possible cash shortage fell on deaf ears.
``The Federal Reserve's decision to create a lending facility for primary dealers and permit a broad range of investment-grade securities to serve as collateral improves the liquidity picture and, from my perspective, takes the liquidity issue for the entire industry off the table,'' Fuld, 61, said in a statement today.
Fuld, who presides over the fourth-largest U.S. securities firm, made the statement as his company's shares declined more than 35 percent in New York trading. Smaller rival Bear Stearns Cos. yesterday agreed to be acquired by JPMorgan Chase & Co. for about $2 a share, 90 percent below the company's market value last week, after customers' withdrawals raised the prospect of bankruptcy. The Fed is helping to finance the deal.
The central bank, aiming to prevent a meltdown in financial markets, yesterday cut the rate on direct loans to banks and became lender of last resort to the biggest dealers in U.S. government bonds.
``In light of what happened with Bear everything else is under pressure and everyone's looking to make sure they have the funding and liquidity,'' said Tim Smalls, head of U.S. trading at Execution LLC in Greenwich, Connecticut. ``We're seeing a classic case of selling first and asking questions later. Every global financial stock is getting whacked.''
Liquidity Pool
Lehman fell $14.26, or 36 percent, to $25 at 2:38 p.m. in New York Stock Exchange composite trading, after dropping as low as $23.65 earlier today. The stock has lost about 60 percent of its value this year.
On March 12, Bear Stearns CEO Alan Schwartz denied market speculation that his firm had a cash shortage. His comments didn't squelch the rumors or stop clients from withdrawing money from Bear Stearns. Two days later the firm ran out of cash and sought emergency funding from the Federal Reserve.
Fuld's comments today failed to ease concern that banks and brokers may face further losses. The Amex Securities Broker/Dealer Index dropped 14 percent while the S&P 500 Financials Index declined 4 percent. Morgan Stanley, the second- largest securities firm, fell 12 percent while Merrill Lynch & Co. lost 10 percent. The only bank among the largest financial firms to gain was JPMorgan, as analysts hailed the acquisition of Bear Stearns for 2 percent of its book value as a good deal. JPMorgan shares rose 9.3 percent.
Emergency Action
In its first weekend emergency action in almost three decades, the central bank lowered the so-called discount rate by a quarter of a percentage point to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it. In a further step, the Fed will provide up to $30 billion to JPMorgan Chase to help it finance the purchase of Bear Stearns.
``Lehman won't go the way of Bear Stearns,'' said Jon Burnham, chief executive officer of Burnham Securities, which manages about $3 billion including JPMorgan shares. ``Bear Stearns is a maverick firm. Lehman is liked.''
Lehman's so-called liquidity pool -- consisting of cash, money market instruments, corporate bonds and stocks that can be sold quickly -- is the strongest among the five largest brokers, according to Sanford C. Bernstein & Co.
`Navigate Through'
Lehman's $98 billion liquidity pool compares with $61 billion at Goldman Sachs Group Inc., the largest and most profitable securities firm, according to Bernstein analyst Brad Hintz. Bear Stearns had $17 billion at the end of the fourth quarter.
Lehman's liquid assets are more than five times greater than its shareholders' equity. At Merrill Lynch & Co., the world's largest broker, and Morgan Stanley, the second-biggest U.S. securities firm, the ratio is three times equity. Goldman's liquid assets are double its equity.
``Over the last 20 years, the U.S. securities industry has learned through experience how to navigate through financially stressful events that can damage confidence,'' Hintz, a former Lehman finance chief, said in a report today.
According to Lehman's annual report, the firm had $35 billion of cash at the end of November and an additional $159 billion of ``unencumbered assets'' that aren't financed by borrowing or tied to other financial commitments.
Options Trading
Mortgage-related assets amount to 29 percent of the financial instruments on Lehman's books, compared with 33 percent at Bear Stearns. An additional 13 percent of Lehman's financial instruments are U.S. government bonds that are easy to sell, according to Bank of America Corp. analyst Jeffrey Rosenberg. Government securities make up 9.8 percent of Bear Stearns's holdings.
``Lehman's prior experience suffering a liquidity crisis could mean it is better prepared to weather the current storm,'' Rosenberg wrote in a report today. Under Fuld, Lehman survived the credit contraction that followed the collapse of hedge fund Long-Term Capital Management LP and Russia's default on its debt in 1998. Lehman shares dropped 63 percent at the time on speculation about a cash shortage.
Lehman options prices surged to a record today as traders increased bets that the shares may drop by half in the next month.
Implied volatility, a measure of how much investors are paying to insure against stock losses, jumped 80 percent for Lehman to a record 237.63. That's almost as big a gain as Bear Stearns posted on March 14, the day of its Fed-led bailout.
Credit Rating
Trading in put options of the fourth-biggest U.S. securities firm exceeded 240,000 contracts, almost four times the daily average in the previous three weeks. Those bearish bets outnumbered bullish ones, or calls, by more than 2-to-1.
Lehman had its long-term credit rating affirmed at A1 by Moody's Investors Service earlier today. The rating company lowered its outlook on the company to stable from positive.
``Lehman has navigated quite well to date through persistently volatile and challenging financial markets,'' Moody's said in the statement. The outlook is no longer positive because the value of the firm's assets is declining and global liquidity is drying up, Moody's said.
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