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Lehman Sinks on Writedown Fears

The investment bank could writedown $4 billion in the third quarter, a JPMorgan analyst says.

Lehman Brothers

(LEH)

shares were hit hard Tuesday on concerns about potential major writedowns on the investment bank's mortgage holdings and a slowdown in the fixed-income markets, where Lehman has a significant book of business.

Lehman stock tumbled 9.5% to $13.61 in recent trading. Its shares have taken a tumultuous ride over the past year, from a high of $67.73 last winter to a low of $12.02 in mid-July amid concern that mounting losses might leave

Lehman insolvent

.

In a client note on Tuesday, JPMorgan analyst Kenneth Worthington cut his earnings estimates for Lehman through 2009, saying he expects the beleaguered bank to take $4 billion worth of writedowns for the third quarter alone. He cited further deterioration in the housing and mortgage markets, as well as a tough credit environment and a slowdown in fixed-income trading volumes.

Cramer: Lehman Is a Takeunder

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Lehman is considered the leading investment bank for fixed income trading on Wall Street, with more than 30% of its revenue coming from that business in 2007.

Analysts expect the firm to post a third-quarter profit of 12 cents per share, on average, according to Thomson Reuters. However, Worthington revised his estimate to a loss of $3.30 per share from a profit of 35 cents per share. He expects Lehman to lose $6.77 per share for the full year and return to a profit of $3.64 per share in 2009.

Speculation has ramped up in recent days about Lehman potentially selling off assets to raise capital, with media outlets reporting that the company has been shopping around its asset-management arm to private-equity firms. The business includes

Neuberger Berman

, which Lehman acquired in 2003 for $3.1 billion.

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However, Worthington doesn't think a sale is likely, saying “we don't think the investors and rating agencies would welcome this divestiture, which brings a steady cash flow, diversification and a lower compensation ratio.

While Worthington said Lehman needs to shore up investor confidence and perhaps raise more capital, he noted reducing risk is a preferable option to selling off valuable assets.

Management wants to leave its mortgage troubles behind and restore confidence, which it can best accomplish by reducing its higher-risk credit exposure, Worthington wrote.

Competitors followed Lehman lower on Tuesday, with

Merrill Lynch

(MER)

sinking 2.8% to $24.05;

Morgan Stanley

(MS) - Get Morgan Stanley (MS) Report

dropping 3.7%, to $38.11; and

JPMorgan

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

falling 3.7% to $35.38.