Lehman stock tumble raises government rescue specter

Lehman shares closed Tuesday down 45 percent at $7.79 on the New York Stock Exchange, and touched their lowest level since October 1998.

The stock tumbled after a report by Dow Jones Newswires that talks on a possible investment from Korea Development Bank broke down, citing the chairman of South Korea's top securities regulator, Jun Kwang-woo. A spokesman for the regulator denied the report, telling Reuters that Jun never made the statement.

The Dow article also quoted an unnamed government official as saying KDB had decided not to invest in Lehman.

A Lehman spokeswoman and representatives for the Federal Reserve and Securities and Exchange Commission declined to comment.

A U.S. Treasury Department spokeswoman said the department stays in touch with Wall Street on a regular basis. NYSE Regulation spokesman Scott Peterson said the exchange is monitoring trading in Lehman shares closely.

Lehman shares rose 8 cents to $7.87 in after-hours trading after Citigroup Inc (C.N), Credit Suisse Group AG (CSGN.VX), Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N) all said they were still trading with Lehman.

And some experts are more bullish on Lehman's prospects as a stand-alone institution, saying it has a long tradition of success that won't quickly evaporate.

"My guess is that Lehman will end up finding a way to survive without government help," said economist Allen Sinai, head of Decision Economics Inc, a global economics and financial markets advisory firm.

But if other firms start pulling their money out of Lehman and it looks like a spreading credit seizure is underway, regulators will be forced to pull the trigger on another shotgun marriage like the one it arranged with Bear Stearns, Litan said.

"That's the nightmare you worry about, Even if it's only a 5 percent or 10 percent risk of that happening, do you really want to take that risk?" Litan said.

(Additional reporting by Mark Felsenthal, Kevin Drawbaugh, Rachelle Younglai; and Ellen Freilich, Christian Plumb in New York)