Bankers said that several top notch Wall Street banks had suspended lines of credit to the firm because of the speculation. There were also reports that traders from other banks were refusing to deal with Lehman.
Senior executives were immediately on the phones to clients and creditors seeking to dispel reports that the bank was about to file for protection from creditors because of huge emerging market losses.
The calls were made as what one banker called "a serious credit crunch" began to develop in the London and US banking system. Credit spreads widened dramatically on growing fears of counter party risk. Lehman spokesman Bill Ahern said: "Everything that has been said about us is categorically untrue, baseless and irresponsible. The fact is that a week ago we put out a statement saying we made $150m in the quarter just traded."
Market sources said it was likely that the US Federal Reserve would provide emergency liquidity rather than running the risk of a high-profile investment bank collapsing with the markets in their current fragile state.
Rumours that a major US investment house was about to go under because of big trading losses have gathered strength over the last few days. There was also wild talk of a rogue Nick Leeson-style trader badly caught out by playing the US Treasury Bill futures market, and of a number of banks suffering big derivatives related losses.
Trading floors were alive with rumours of several other banks being in trouble because of the recent financial market turbulence. "It is indicative of the the kind of panic out there," said one investment banker yesterday. Some $250bn has been wiped off the value of the top tier Wall Street banks over the last month. On top of their direct exposure to emerging markets, many banks have been hit indirectly because of client difficulties, particularly among some of the big hedge funds.
Lehman shares have fallen 60 per cent in recent weeks. Other investment banks have also seen their shares fall, but Lehman shares have been hit much harder than most. The stock fell $5 and seven-eighths to $32 and three-quarters yesterday.
Dealers said that for a major investment bank to go under at this point would turn the current bear market into a full scale crash.
Lehman has grown rapidly in recent years since being hived off from American Express and floating on the New York stock market as an independent investment bank. However, the firm has never quite broken into the charmed circle of so-called bulge bracket firms like Morgan Stanley and Goldman Sachs and is generally regarded on Wall Street as a "second-tier" bank.
As one of the few independent Wall Street brokerages left, Lehman has been seen as frequent takeover target for foreign banks seeking to expand in New York.
Bankers said that since the Russian default and with the Latin American currencies under pressure, firms have found it steadily harder to get access to capital.
Spreads, the risk margin banks charge for lending, have been widening particularly for sophisticated hedging instruments like swaps which are widely used by investments banks and hedge funds to finance short-term trades. "Banks have been calling in loans all over," said one banker last night.