Lehman Brothers Sinks, Despite Rally

Editor's note: Our "On the Brink" series will provide daily insight into the financial firms facing capital shortfalls and the growing pressure from short sellers in the market.

Shares of Lehman Brothers (LEH Quote) were down sharply amid a broad market rally Monday, as prominent analysts predicted some $4 billion in writedowns ahead of its third-quarter results next week.

Lehman shares finished down 12.7% to $14.15, despite a more than 290-point rally in the Dow Jones Industrial Average following the federal bailout of mortgage giants Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote).

Though the takeover of Fannie and Freddie brings some clarity to the market for residential real estate and related securities, it has no immediate impact on housing prices, which many analysts believe will continue to fall. Lehman also has problems in commercial real estate, having spent the last two months trying to unload roughly $30 billion in commercial mortgage-backed securities.

Cramer: The Bailout's Biggest Winners

In a Monday research note, Sanford Bernstein analyst Brad Hintz predicted Lehman will be unable to sell the securities and will have to write down $4 billion to $5 billion prior to spinning them off into a new company. Hintz also predicts a management buyout of Lehman's asset management subsidiary, Neuberger Berman.

Oppenheimer & Co. analyst Meredith Whitney, in another note Monday, estimated an additional $4 billion in writedowns for Lehman related to both real estate and leveraged corporate loans. She cut her third-quarter estimates from a gain of 23 cents to a loss of $2.70. Lehman will announce third quarter results after the market closes on Sept. 18.

Most analysts saw the takeover of Fannie and Freddie as a slight positive for banks and brokers long-term, as they assume Freddie and Fannie will become less competitive as underwriters of new mortgages going forward.