Will the subprime crisis and resulting credit crunch claim more victims? The rapid demise of Bear Stearns and its ensuing fire sale to J.P. Morgan has lead to rampant speculation about whether other firms are on shaky ground and likely to experience similar disasters. Recent press articles have stated that Lehman Brothers, a firm that, similar to Bear Stearns, has a substantial exposure to mortgage and fixed income securities, has been the subject of market concern. In recent months, Lehman’s shares have fallen dramatically in value and the cost of insuring its debt has soared.
While Lehman has issued an array of statements to reassure the public of its solid financial foundation and its readily available liquidity, these statements seem reminiscent of similar statements made just last week by Bear Stearns. In fact, on March 12, 2008, Bear Stearns’ CEO Alan Schwartz appeared on CNBC and stated “We don’t see any pressure on our liquidity, let alone a liquidity crisis.” Two days later Bear Stearns needed funds from the Fed to open its doors. Four days later it was sold to JP. Morgan for $2/share. So, unfortunately, it’s impossible to know exactly what Lehman’s position really is. The wide-spread use of complex derivative securities by Lehman and other major Wall Street firms has made it virtually impossible to gauge who has the risk and how much risk they have.
With the uncertainty swirling around the financial markets, investors are well-advised to be extremely cautious in their dealings.
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