Wall Street continued to reel yesterday from the worst financial crisis since the Great Depression as the formidable Lehman Brothers saw its share price fall by half in panicked selling before ending down 19 percent on the day. Everyone else on the Street got sold off, too, with the exception of Bear Stearns’ buyer JPMorgan Chase, who investors are speculating may have gotten the Bear bones with some meat still on them.

The Wall Street Journal puts its Lehman story up high on A1, using it as an example of how the panic is spreading and giving us an inside look at how the firm is dealing with it:

A cascade of bad news —more than $150 billion in write-downs on securities tied to subprime mortgages, wounded banks seeking capital infusions and emergency interventions by the Fed—is feeding a chaotic environment of rumors and speculation on Wall Street where many traders and investors have begun to believe the worst even in the absence of hard facts.

Steady at the top

Fortunately for Lehman Brothers, the company and its longtime CEO Dick Fuld have been here before—recall the 1998 implosion of the Long Term Capital Management hedge fund that threatened Lehman and the broader financial system—and learned some lessons.

“In 1998, we learned we need a lot of liquidity and we also know we need to deal with rumors as they arise, not long after,” Mr. Fuld said in an interview yesterday.

Starting last Friday, any time a jittery trader at another firm refused to do a trade with Lehman, a top Lehman official immediately called the trader’s supervisor with assurances of Lehman’s strength— and a prod to accept the trade.

The New York Times on C1 reports Lehman has plenty of cash right now, but quotes “critics” it says are short-selling hedge funds, saying the firm has $76 billion in commercial and residential real estate assets and marking them down to the current value of real estate indexes would result in a $5 billion hit. Lehman also has $42 billion in assets that have no “observable” value in the markets, raising questions of how accurately the firm is accounting for its capital.

“The game here is confidence,” said James Hardesty, president of Baltimore-based Hardesty Capital Management LLC, which oversees $700 million for clients. “The profit figures depend on how illiquid assets are marked to market, and investors don’t trust those numbers.”

In plain English, that means Lehman’s earnings depend on how much it values assets that it isn’t able to sell right now because markets are frozen. Investors think Lehman and others are being too optimistic about what those securities are worth.

Still, the Financial Times’ Lex column says “immediate liquidity fears look overblown” regarding Lehman, especially because of the Federal Reserve’s extraordinary move to open its lending to non-banks like Lehman and other Wall Street broker-dealers.

Lehman reports fourth-quarter earnings today (as does Goldman Sachs), and Bloomberg says the firm may post its smallest profit since 2003 on $3.5 billion in asset write-downs, according to analyst estimates.

Specter of 1990s Japan

The Journal reads the writing on the Wall (Street) and in a ponderous page-one story says the government responses to the financial collapse are coming into view and will likely include new regulation, big bailouts, and what it calls “fiscal incentives.”

Those incentives include more money drops by the Fed, and actions by Congress and the White House to subsidize the housing market. Check out the nice chart the Journal puts together on how the crisis got going.

The paper says the aim right now is to avoid a 1990s Japan-style depression, though it says the “U.S. turmoil so far doesn’t look nearly as intractable as Japan’s.”

Indeed, the goal of U.S. policy makers is to avoid the malaise that gripped Japan for a decade after its banks accumulated vast sums of bad debt following the burst of a late-1980s bubble in real estate. When land prices collapsed, so did the value of the real-estate collateral that backed most loans, leaving many borrowers unable to repay and saddling Japanese lenders with trillions of yen in bad loans.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.