Lehman clients trim exposure, wary of new business

By Elinor Comlay and Dan Wilchins

NEW YORK (Reuters) - Some Lehman Brothers' clients are wary of entering new trades with the struggling investment bank and others have withdrawn from doing business with it altogether, traders and risk managers said.

Two major banks said on Thursday they continue to trade with Lehman normally, and traders at other banks said that is generally true across Wall Street.

But some clients are pulling back, in part because of fears Lehman's credit ratings will be downgraded, the traders said.

Clients closing out business with Bear Stearns brought that investment bank to the brink of bankruptcy in March.

The fact that clients are pulling back from Lehman underscores the urgency of its efforts to shore up its capital or sell itself altogether, before its business melts away.

Sources familiar with the matter told Reuters on Thursday the investment bank was looking to sell itself, and other reports said the U.S. government could intervene.

Lehman spokeswoman Monique Wise declined to comment.

One hedge fund manager told Reuters his fixed-income traders stopped doing business with the firm on Monday, while a head trader at a mid-sized mutual fund said his company had reduced its credit default swap positions with the bank and is reviewing cutting its remaining exposure.

And at one insurance company, traders of equity derivatives -- including stock options and forwards -- said they were not entering new over-the-counter positions with Lehman Brothers.

"The derivatives books are probably shut down at this point, counterparties are probably not doing derivatives with them," said Brad Hintz, an analyst at Sanford C. Bernstein and a former Lehman Brothers chief financial officer.

'STILL TRADING?'

Banks lose business all the time, and many investment banks have lost business to commercial banks in recent months.

Hintz said that clients should have no problem trading short-dated instruments with Lehman.

For these instruments clients are only exposed to Lehman for short periods of time, generally under one year.

Many derivatives, such as interest rate swaps, can span a number of years.