Analysts say Lehman failure will hurt credit markets

By Tenzin Pema

BANGALORE (Reuters) - Analysts on Monday said the failure of Lehman Brothers Holdings Inc will cause a major reduction in credit market liquidity and raise concerns over substantial counterparty risk exposure that Lehman had, while forcing other brokers to mark down the value of their assets.

"We expect the financial markets to be under unprecedented strain over the next several days as players respond to outsized industry deleveraging," Oppenheimer & Co's Meredith Whitney said.

The immediate impact of Lehman liquidation will be a dramatic credit spread widening and ultimately negative valuation marks for the remaining players, Whitney wrote in a note issued late Sunday.

In a separate research note, veteran banking analyst Richard Bove on Monday said he expects the credit default swap (CDS) market to be in turmoil.

Credit default swaps are used to hedge against the risk of a borrower defaulting on their debt, or to speculate on a company's credit quality.

"The biggest issue today will be following the money trail. Who has the most indirect lending to Lehman? Who has the greatest counterparty risk?," Ladenburg Thalmann & Co's Bove added.

Panmure Gordon & Co's Sandy Chen echoed Bove's sentiment.

Chen said the market's focus will now shift from estimates of write-downs, capital needs and merger and acquisition scenarios, to concerns about counterparty exposures and default risks.