Lehman in Free Fall as Default Fears Mount

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.

Updated from 12:45 p.m. EDT.

Lehman Brothers(LEH Quote) shares fell 45% Tuesday, as a prospective deal to raise capital hit a snag and concern the firm would default on its debt mounted.

Lehman Brothers shares fell $6.36, or 45%, to $7.79 at Tuesday's close after Dow Jones reported that Jun Kwang-woo, chairman of the Financial Services Commission in South Korea said Korea Development Bank and Lehman have ended discussions. Mr. Jun could not be reached and a Lehman Brothers spokesman declined to comment.

Lehman's stock is off 88% from its 52-week high. Richard Bove, an analyst at Ladenburg Thalmann, predicted that the government would broker a private investment in or takeover of Lehman or one of its businesses overnight before the market opened on Wednesday.

Late Tuesday, the company said it would announce its expected third-quarter results, along with "key strategic initiatives" at 7:30 a.m. EDT on Wednesday.

Fear surrounding the firm was evident in Tuesday's trading of derivatives insuring against default on Lehman debt.

Swaps on Lehman Brothers debt indicate a 35% chance the firm defaults, according to Tim Backshall, chief strategist at Credit Default Research, a provider of market data and analysis. The price of insuring against $10 million worth of Lehman debt rose from $322,000 to over $500,000 on Tuesday.

"The market is pricing in pretty much Armageddon right now," Backshall says, noting that the price of default protection on Lehman is higher now than it was during the March weekend when the federal government brokered the sale of Bear Stearns to JPMorgan Chase(JPM Quote) to prevent it from going out of business.

Lehman Brothers continues to talk to other investors, including Nomura Securities, Bloomberg reported.