Lehman has Street's trust, for now, traders say

NEW YORK (Reuters) - Wall Street is all about trust, and Lehman Brothers appears to still have it -- for now, anyway.

Fear that the company could suffer the same fate as Bear Stearns Cos Inc BSC.N hit its stock hard on Friday.

But a half-dozen hedge funds that Reuters spoke to were not unwinding their trades with Lehman Brothers Holdings Inc LEH.N, and said they had no trouble trading with it. Two dealers said they were conducting business as usual with Lehman.

Bear, heavily exposed to the faltering U.S. mortgage market, burned through cash and lost access to funding this week as clients pulled out assets and unwound trades.

Lehman, the fourth-largest U.S. investment bank, is more diversified than Bear, the fifth-largest. It has more than $195 billion of assets at its ready disposal and says it can fund its operations for 12 months without outside financing.

But Lehman does have extensive mortgage assets, and one credit derivatives dealer, speaking on condition of anonymity, said his bank was pulling back on its exposure to Lehman, as were his clients.

Rumors of funds unwinding positions with Lehman abounded, with everybody from risk management consultants to hedge fund managers to traders having heard them.

Lehman shares were down more than 14 percent while shares in the top three U.S. investment banks lost only 5 or 6 percent. Bear Stearns shares lost nearly half their value.

Confidence is crucial to banks on Wall Street, which are trusted by investors to use borrowed funds wisely. The slightest whiff of trouble can quickly trigger a run on the bank.

Even if clients leave, Lehman is likely in a better position than Bear. At November 30, Lehman had some $35 billion of liquid assets, and another $160 billion of assets it could sell if it had to.

Lehman said on Friday it had closed on a $2 billion, 3-year unsecured credit facility.

But markets are broadly jittery now, all the more so after Bear said it needed emergency funding on Friday, getting a lifeline from the Federal Reserve Bank of New York using JPMorgan Chase & Co Inc (JPM.N) as a conduit.

"It's very very damaging to psychology to have the fifth-biggest brokerage firm go from viable to practically defunct in a week because it makes people say, 'What about No. 4?'" Jeffrey Gundlach, chief investment officer of TCW Group in Los Angeles, which invests $160 billion.

Lehman spokesman Randall Whitestone said, "Our liquidity position has been and continues to be very strong," adding that the company's standing plan to handle liquidity is a competitive advantage.

Shares of Lehman Brothers lost $6.73, or 14.6 percent, to close at $39.26 on Friday. Bear shares lost 45.9 percent, or $26.15, to close at $30.85, also on the New York Stock Exchange.

Lehman had $37.3 billion of residential mortgage assets on its balance sheet as of November 30, and another $38.9 billion of commercial mortgage assets. These are big exposures for a firm with shareholders' equity, or assets minus liabilities, of about $22 billion.

Significant write-downs to the mortgage assets could eat through Lehman's capital base. Lehman, which reports first fiscal quarter results on Tuesday, is expected to post net income of 71 cents a share, according to Reuters Estimates.

UNRULY MARKETS

In topsy-turvy markets, many investors and dealers are less willing to take risks with banks they trade with.

"If Bear Stearns is on the brink of being insolvent, the fear would be that there might be other organizations almost as weak," said James Kochan, fixed-income strategist at Wells Fargo Funds Management in Wisconsin.

The cost of protecting Lehman's obligations against default for five years surged to 465 basis points, or $465,000 a year per $10 million protected, from $400,000 the day before.

The cost of protecting other dealers' debt against default surged as well, most notably for Citigroup (C.N). But stand-alone investment banks, which don't have access to emergency Federal Reserve funding, are bigger risks, analysts said.

Bear Stearns Chief Executive Alan Schwartz said on a conference call on Friday that his firm has essentially experienced a run on the bank, as growing rumors of credit problems spurred counterparties to unwind derivatives and other trades, and clients to withdraw funds from prime brokerage accounts.

"Rumors intensified, and given the nervousness in the market, people wanted to protect themselves from the possibility of the rumors being true," Schwartz said.

Bear Stearns said on Friday it received an unspecified amount of secured financing from JPMorgan Chase & Co, which was backed up by the Federal Reserve Bank of New York.

(Additional reporting by Karen Brettell; Editing by Gary Hill)