Analyst: Lehman should be private; financials fall

Financials such as Merrill Lynch & Co. and Morgan Stanley dropped sharply amid more uncertainty about their fate. The most dramatic drop came from Lehman, which tumbled to a 9-year low on fears it does not have enough capital to stay in business.

The decline in investment bank shares had David Trone, an analyst with Fox-Pitt Kelton, say the only way to stop Lehman's 79 percent stock dive this year is to sell the company to a buyout consortium.

"This would eliminate the disconnect between Lehman's true financial condition and current stock price by eliminating the run-on-the-bank discount," he said.

Investors have retreated from financial stocks to such an extent that it has wiped off nearly $180 billion of market value from the four biggest U.S. investment houses in the past 12 months. That's enough money to pay every American roughly $600 each.

Financials' battered stock prices is troubling to analysts because any market rumors could send stocks plunging further, and deplete companies' capital to such an extent that an investment bank might not recover.

For instance, shares of Lehman Brothers slid last month on rumors that customers were pulling back business. Though the investment bank denied the talk, the Securities and Exchange Commission is now investigating if the trading floor chatter was started by investors looking to short the stock.

Those same kind of rumors nearly caused the collapse of Bear Stearns Cos. in March before the government stepped in and sold the company to JPMorgan Chase & Co. Analysts believe the government's plan to help Fannie Mae and Freddie Mac might be its last intervention, and that the remaining investment banks would be left to fend for themselves.

"The U.S. apparently has been unable to find investors for Fannie and Freddie," said Richard Bove, an analyst with Ladenburg Thalmann. "This means that the financial markets are in a worse crisis than I have dreamed would be possible."

The market might get a better indication of how the companies are faring when three major financial institutions report earnings this week. Citigroup Inc., JPMorgan and Merrill Lynch are expected to report more write-downs for the second quarter, adding to the nearly $300 billion already taken by global banks and brokerages.