2:00PM New York – Lehman plunges only adds to the investor stress after a collapse in Bear Stearns stock.

U.S. stock indexes wavered after a collapse in Bear Stearns stock this morning.

The liquidation of the fifth largest brokerage firm sent shock waves in the financial community and stocks of other brokerages and banks dropped in the morning. The Fed acted on the weekend to lower discount rate by 0.25% and is widely expected to lower the Fed fund rates in tomorrow’s meeting.

Lehman Brothers (LEH) plunged as much as 50% after a statement from its chief executive Richard Fuld failed to soothe market. Lehman traded down $14.26 or 37% to $25.10. A vague statement from the executive put investors on the edge and stock quickly lost 50%.

Lehman Brothers, Merrill Lynch, and Goldman Sachs fell sharply as investors worried the soundness of their asset portfolios.

Lehman, according to its latest financial statement released at the end of November had $21 billion in cash and long term assets of $614 billion. The company held $123 billion in liabilities. Analysts estimate that Lehman has access to capital of $91 billion. The key measure of the bank’s leverage is the ratio of financial asset to cash. The ratio at Lehman is 30, a huge leverage and could have deteriorated more in the last three months of financial distress.

A small decline in asset valuation, a loss of client confidence, and a rise in margin calls on the borrowed funds could wipe out the equity of the bank in a matter of days. Worried investors could essentially stage a run on the investment banker.

Merrill Lynch (MER) ratio of financial assets to cash is 18. The leverage Merrill also worries investors as the broker has $41.4 billion of cash and $717 billion of long term assets at the end of 2007. Since then financial markets have deteriorated and values of these assets are likely to be lowered again.

Morgan Stanley (MS) at the end of November had cash position of $87 billion and long term financial assets of $506 billion. The ratio of assets to cash is 6, one of the lowest ratios in the industry.

Goldman Sachs (GS) at the end of November had cash position of $11.8 billion and long term net assets of $818 billion. The ratio of financial assets to cash at the investment banker at that time would be above 70.

Continued deterioration in the mortgage securities values and lack of liquidity in various segments of structured financing will only increase liquidity stress at these large brokerage firms.

Not all long term assets are subprime assets but it is the lack disclosure and public awareness of the nature of the liquidity that is worrying the investors.