In the wake of Bear Stearns Firesale to JP Morgan, which itself is far from immune to panic withdrawals, the credit crisis loss of confidence contaigent appears to have Lehman Brothers in its sights. Panicking Wall Street investors who saw their shares in Bear Stearns go from $62 to $2 in a matter of days dumped stock in Lehman Brothers on Mondays opening. The stock traded down to $20 on Monday before rallying and closing at $31.75 down about 20% on the day.

Lehman's Chief Executive issued soothing statements that the investment bank had more than $35 billion in cash, which were reminiscent of last weeks announcements by Bear Stearns CEO on Tuesday that everything was okay.

Chart courtesy of bigcharts.com

Lehman brothers like Bear Stearns is a big player in the over leveraged and now deleveraging derivatives market, where a relatively small loss of 5% could wipe out the bank due to the estimated 30X leverage deployed.

Would the US Fed Step in to Save a Collapsing Lehman Brothers ?

Well that would depend on whether the Fed considered Lehman Brothers failure would result in a cascade of failures amongst its derivatives counter parties.

Whilst Lehman Brothers CEO can make appearances on CNBC to talk up the banks balance sheet. The fact is that if the banks creditors, mainly other banks, brokers and hedge funds panic, then it would all be over for Lehman brothers within hours. So the key is too look for indications of what actions the banks customers are taking in that respect and what the stock price is saying. In that respect the bounce from $20 to $31.75 is positive, however should Lehman Brothers break below $20 then it would indicate imminent collapse. On the other hand if its clients are able to hold their nerve and not panic then this may prove the long-term buying opportunity of a lifetime! Though don't take that as any sort of recommendation to buy ! Not under current market conditions. As the sale of Bear Stearns to JP Morgan is NO BAILOUT ! No, you can not class Bear Stearn shareholders losing 97% of the value of their investment in 2 days as a bailout.

US Interest Rate Cut

Forget 0.25% or 0.5% Cut at Tuesday's FOMC meeting, the market panic ensures that the Fed is going to cut by at least 0.75% and possibly as much as 1%. This being an election year, the US Fed has no choice but to abandon the US Dollar in an attempt to avert a pre-election recession. Today 2%, then what ? 1%, 0.5%?, follow Japan into 10 years of economic stagnation ?

The consequences of the rate cuts will be for a further sharp falls in the US Dollar against most major currencies, with the price of inflation to pay later in the year and well into 2009.

So many uncertainties and so much volatility!

By Nadeem Walayat

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 120 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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