Is Lehman Brothers Next to Go?

I thought the Giants' Super Bowl win would be the shocker of the year. I was sorely mistaken. Bear Stearns' (NYSE: BSC) agreement to be salvaged by JPMorgan Chase  (NYSE: JPM) over the weekend is one of the most jaw-dropping events the stock market has seen in many years.

The news is so outrageous because JPMorgan paid only $2 per share for Bear. Last year, Bear Stearns shares traded for more than 80 times that pittance of a price. At just more than $230 million in total, the buyout seems more like a sympathy offer than an actual investment on JPMorgan's part. To put it in perspective, the fees alone from Visa's upcoming IPO will generate roughly $480 million for the associated investment banks.

The price of the Bear Stearns deal tells us that for all intents and purposes, Bear Stearns -- one of the oldest and largest Wall Street investment banks -- went bankrupt over the weekend. That's a pretty scary development. I'm not talking Cher-in-a-black-leather catsuit scary -- I'm talking Roseanne-singing-"The Star-Spangled Banner" scary.

It's all in the numbers
Companies fall from grace every now and then -- that's not what's important here. Here's the crucial fact, both for Foolish investors and other investment banks over the next few weeks: By most accounts, Bear Stearns' crumble owed to a modern-day run on the bank, not actual defaults on its assets.

Bear's management spent most of last week trying to soothe investors' nerves and convince the world that it had enough liquidity to maintain business as usual. That's probably true. The final blow to its liquidity position, ultimately leading to Friday's bailout, came when counterparties such as hedge funds and other investment banks jumped ship. Many began pulling their money out after uncertainty in the financial markets reached a new crescendo. Whatever the actual quality of its assets, a firm is only as liquid as investors and clients perceive it to be.

Next to walk the plank
For other Wall Street investment banks, that isn't a rosy scenario. Some of the larger firms, such as Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS), have incredibly diverse operations that spread far past the subprime debt market, and they probably won't face anywhere near the fallout Bear Stearns has seen. However, one Wall Street neighbor looks a bit too similar to Bear in terms of its operations: Lehman Brothers (NYSE: LEH).

Although Lehman has largely been able to sidestep major losses amid the subprime mess, like Bear Stearns, it does a disproportionately large amount of business in the fixed-income and mortgage-backed-securities market. For investors and clients facing Bear Stearns shares that now trade around 90% below their Friday closing, a similar "run on the bank" on Lehman's assets isn't far-fetched.

The same thing that drove Bear Stearns into the gutter is now Lehman's worst enemy: fear. The speed and severity of Bear's collapse is throwing gasoline on the firestorm of panic now consuming the debt market. Under normal, rational market conditions, there isn't any reason why "Lehman Brothers" and "bankruptcy" should be mentioned in the same sentence. But just as Bear Stearns learned over the weekend, and as Thornburg Mortgage (NYSE: TMA) learned a few weeks ago, these are far from normal times.

Get ready to rumble
The wilder events in the financial market become, the more investors and clients alike are tempted to yank money out of banks and sit on the sidelines. But that very attitude may edge Lehman Brothers uncomfortably closer to its own market meltdown.

Truth be told, Lehman hasn't made any significant announcements regarding its liquidity or future operations. Then again, Bear Stearns didn't, either -- until it reached the Wile E. Coyote moment when it looked down and realized that the ground it once stood on had ceased to exist.

For related Foolishness:

• What the Heck Is Investment Banking, Anyway?
• Bear Stearns Hits the Panic Button
• Is It Safe to Go Back in the Water?