Lehman shares fell by more than 14 per cent, whereas shares in the top three US investment banks slipped by only 5 or 6 per cent.

Bear Stearns shares lost nearly half their value, after the shock disclosure last Friday that the bank needed emergency funding from the Federal Reserve.

Chief executive Alan Schwartz said his company had essentially experienced a run on the bank, as growing rumours of credit problems spurred counterparties to unwind derivatives and other trades, and clients to withdraw funds from prime brokerage accounts.

Rumours of funds unwinding positions with Lehman also abounded last Friday, with everybody from risk management consultants to hedge fund managers to traders having heard them.

The price for insuring Lehman's debt jumped to US$478 per US$10,000 in bonds on Friday afternoon, from US$385 in the morning, according to Thomson Financial.

But half a dozen hedge funds that Reuters spoke to said they were not unwinding their trades with Lehman, and added they had no trouble trading with it. Two dealers said they were conducting business as usual with Lehman.

Lehman, the fourth-largest US investment bank, is more diversified than Bear Stearns, the fifth-largest. It has more than US$195 billion (S$269.8 billion) in assets at its ready disposal and it says it can fund its operations for 12 months without outside financing.

Still, Lehman does have extensive mortgage assets, and one credit derivatives dealer, speaking on condition of anonymity, said his bank was pulling back on its exposure to Lehman, as were his clients.

Confidence is crucial to banks on Wall Street, which are trusted by investors to use borrowed funds wisely. The slightest whiff of trouble can quickly trigger a run on the bank.

Even if clients leave, Lehman is likely to be in a better position than Bear Stearns. As at Nov 30, Lehman had about US$35 billion in liquid assets and another US$160 billion in assets that it could sell if it had to. It also said last Friday that it had closed on a US$2 billion, three-year unsecured credit facility.

But Lehman also had US$37.3 billion in residential mortgage assets on its balance sheet as at Nov 30 last year and another US$38.9 billion in commercial mortgage assets. These are big exposures for a company whose shareholders' equity, or assets minus liabilities, comes to about US$22 billion.

Significant write-downs to the mortgage assets could quickly deplete the bank's capital base.

Lehman spokesman Randall Whitestone said: 'Our liquidity position has been and continues to be very strong.'

He added that the company's standing plan for handling liquidity is a competitive advantage.

However, markets are broadly jittery now, all the more so after Bear Stearns said it needed emergency funding on Friday and sought a lifeline from the Federal Reserve Bank of New York via JPMorgan.

'It's very, very damaging to psychology to have the fifth-biggest brokerage firm go from viable to practically defunct in a week because it makes people say, 'What about No. 4?' ' said Mr Jeffrey Gundlach, the chief investment officer of the TCW Group, which manages US$160 billion.

REUTERS