From CNBC :

NEW
YORK (Reuters) - Shares of Lehman Brothers fell by nearly 10 percent in
early New York trading on Thursday on rumors that the fourth largest
U.S. investment bank could see a run on the bank similar to what
happened to Bear Stearns, traders said.

Declines
in Lehman's shares on Thursday are "all being tied to fears of Bear
Stearns," said Robert Bolton, head trader for Mendon Capital Advisors
in Rochester, New York. "Does another broker dealer go the route of
Bear Stearns with regard to their solvency and the like."

A Lehman spokeswoman called the rumors "totally unfounded," which contributed to the stock taking back much of its losses. Hey, isn't that what Bear Stearns said right before they were going to declare bankruptcy? Do you remember the "Short me, Please!" phrase?

Kerrie
Cohen, a spokeswoman for Lehman Brothers, said, "There are a lot of
rumors in the marketplace that are totally unfounded. We are suspicious
that the rumors are being promulgated by short sellers of our stock
that have an economic self interest." Hmmm... Is that your viewpoint when positive news about your stock is circulated and your stock rises, like last week? I suspect that rumors were being promulgated by long buyers of your stock that had an economic self interest! Let's not cast aspersions, since that can easily cut both ways. As a short seller of your stock, I am a bit sensitive.

At midday, Lehman shares were down 4.28 percent at $40.67 on the New York Stock Exchange, after falling as low at $38.36.

The
U.K.'s Times reported on March 19 that the U.S. Securities and Exchange
Commission (SEC) was probing whether hedge funds and other market
players deliberately circulated false rumors about Lehman Brothers to
push the company's shares lower. Which is cool, as long as they extend the investigation back to last week when the stock popped as well, looking for pump and dumpers. The macro and micro environment for these companies are extremely negative, performance and fundamentals are quite negative, and the outlook for the medium term looks bleak, with the threat of regulation for the long term. It makes much more sense for the stock to move down, rather than up. It bothers me when the government and the media (ala CNBC, et. al.) condone the pump and dump, but when valid concerns about fundamentals and macro trends arise there is all of a sudden a mass conspiracy.

Investors
have been skittish about investment banking shares since the middle of
the month when Bear Stearns Cos Inc experienced a run on the bank amid
fears that its mortgage exposure could leave it insolvent. Schwartz's statement right before his bank's collapse would be enough for anyone in their right minds to be concerned when Lehman decries the Short me, Please! phrase.

Other
traders, who declined to be identified, echoed Bolton's assessment for
the reason behind the drop in Lehman's shares. In addition, large
bearish bets on Lehman in options markets contributed to selling
pressure, some traders said. I'll have to admit that my position is not as large as it should be yet. It is larger than it was, but it hard to build a truly worthwhile position with the puts as expensive as they are, excessive IV.

Lou Brien, a
strategist with DRW Trading Group in Chicago, said there had been a
rumor on Thursday that Lehman was close to making an announcement,
which contributed to the shares selling off, but the announcement
proved to be about the bank hiring a new co-head of global
institutional distribution, after which shares recovered.

Lehman
Brothers a decade ago derived an outsized proportion of its earnings
from the U.S. bond market and has long been an active player in
mortgages, leading some investors to argue the company could be
devastated by the credit crisis. But Lehman's business is much more
diversified than it was in the 1990s, and the company has not posted
any net losses during the credit crunch.The mere fact that they are so susceptible to risk rumors means that they are a risky bank. This is common sense. Who wants to rely on them as a countery party when they have to make an announcement every week to defend themselves against said "promulgators" as their share price drops 10%, 20% 40%, 50% and then pops up for a 20% run to fall back down 12 to 15% again - in just two weeks. Lehman's stock currently sports 195% volatility. That's more than on the options of many hot trading and gossip stocks like the homebuilders. Beta, risk, volatility, deviation from expected return, whatever moniker you want to slap on it, the shares of this company have grown quite risky, reflecting the risk premium the market has slapped on their business. Founded or not, it is there. Is it even worth the risk dealing with them? Who want's to be the huckleberry to find out?

Since
Bear was forced to announce plans to sell itself to JPMorgan Chase
& Co on March 16, the Federal Reserve has allowed investment banks
to borrow directly from the central bank, in a move designed to shore
up the financial system.

In an e-mailed
statement on March 17, Lehman Chief Executive Dick Fuld said the Fed's
creation of a liquidity facility for primary dealers "from my
perspective, takes the liquidity issue for the entire industry off the
table." If things keep going the way they are, Lehman will be the first to put Mr. Fuld's theory to the test.

Lehman said on March 18 that its
holding company has $34 billion of assets it could easily sell, and
another $64 billion of assets it could borrow against. Regulated
subsidiaries have another $99 billion of assets it could borrow against. Hmmm... "easily sell". That's the problem with liquidity. When you have liquid instruments, liquidity is always there - until there is a dearth of liquidity and you really need to sell them.

Japan is trading down, allegedly due in part to Lehman liquidity concerns. There would be much less gossip and innuendo if Lehman didn't hit the discount window the second it was available. See Wall Street Firms Borrowing Heavily From the Fed

Big Wall Street investment
companies are taking advantage of the Federal Reserve's unprecedented offer to
secure emergency loans, the central bank reported Thursday.

Those firms averaged $32.9 billion
in daily borrowing over the past week from the new lending facility, compared
with $13.4 billion the previous week. The program, which began last Monday, is
part of the Fed's effort to aid the financial system.On Wednesday alone, lending
reached $37 billion.

On a seperate, but related note, I may be bringing the blog analysis over to Europe. Lehman forcasts a 35% chance of recession in the UK and a drop in the official rates from the BOE. The UK and eurozone banks are doing as bad as the US banks, if not worse. The pound is due for a pounding as well, both against the dollar and the euro. So, if the financial stocks rally against the fundamentals ala the US financials, I will start my shorts over there as well. I will be doubly as speculative, but the potenial return is worth the risk in my eyes.