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.

Mark Gongloff in the WSJ’s Ahead of the Tape column says “Fed’s Actions Are Reminiscent of Japan in ‘90s.” It’s a must read.

Hey, everybody, what does the president have to say about all this?

“One thing is for certain—we’re in challenging times, ” said President Bush yesterday after meeting with his economic advisers. “But another thing is for certain—that we’ve taken strong and decisive action.”

Seriously,folks, this guy is the president. No Quote of the Day for you, George! That goes to your favorite Congressman Barney Frank, courtesy of the NYT:

“This regimen of total deregulation has essentially allowed the economy to be held hostage to some financially irresponsible actions,” says Rep. Frank. “There is no choice but to pay some ransom.”

How to skin a Bear

The WSJ has a good explanation of how the Fed’s bailout of Bear Stearns could actually affect taxpayers. It took on some of Bear’s junk assets to enable JP Morgan to buy the essentially bankrupt company. The paper quotes a former Fed official saying the central bank will likely lose money on the move, lowering the payments it submits to the Treasury, which last year totaled some $34 billion.

Bloomberg looks at the lack of regulatory prowess at the SEC in the wake of the Bear Stearns collapse. Here’s the lede:

U.S. Securities and Exchange Commission Chairman Christopher Cox was asked on March 11 if he was concerned about the financial condition of Bear Stearns Cos.

“We have a good deal of comfort about the capital cushions at these firms at the moment,” Cox told reporters.

Three days later, the Federal Reserve said it was pumping emergency funds into the 85-year-old securities firm through JPMorgan Chase & Co., the third-biggest U.S. bank by assets…

Bear Stearns’s forced sale days after the SEC chief’s reassurances is raising questions about the vigilance of the top U.S. securities regulator, which is charged with making sure Wall Street firms have enough cash to survive a crisis.

What did Bear Stearns CEO Alan Schwartz know and when did he know it, Coxie?

This is good news?

The papers all note the relief that a stock-market crash didn’t happen yesterday.

The Times’ omnipresent Vikas Bajaj has a story on page one headlined “Plunge Averted, Markets Look Ahead Uneasily.” The WSJ’s C1 story leads with “The nightmare scenario didn’t happen” while the Los Angeles Times headline reads confusingly, “Bearishly good news: Stocks don’t fall as far as expected.”

The Dow eked out a 0.2 percent gain (twenty-one points) after dropping nearly 2 percent in early trading. It would have been in the red if not for the big jump in JP Morgan shares on hopes by investors that it got Bear Stearns at a fire-sale price. The S&P 500 dropped 0.9 percent or 11.54 points.

But financial stocks other than JP got drubbed. Options trader MF Global plunged 65 percent, Ohio bank National City fell 43 percent, while Washington Mutual dropped 13 percent. The WSJ says the latter two are high on lists of banks most likely to “face trouble.”

The Journal’s Heard on the Street column says Wall Street stocks have further to fall, based on conservative estimates of what their book values really are.

The FT says money markets “virtually ground to a halt as the weekend’s developments severely knocked confidence and made banks extremely unwilling to lend to each other.”

How to meltdown

The WSJ gives its readers a long A1 walkthrough of the “six days that have shaken American capitalism.”

The paper reports that Bear Stearns CEO Schwartz was “out of pocket” at a media conference in Florida as the crisis began in earnest last week. What is it with these Bear CEOs?

Treasury Secretary Paulson helped speed up the Bear Stearns deal after being hit by calls at his home Saturday morning from panicked CEOs worried about a contagion.

Watch the drama build at JP Morgan world headquarters that day as the deal is plotted:

By 7:30 p.m., hunger pangs had taken hold. Someone ordered Chinese food. A security guard lay out a buffet spread.

The WSJ notes that JP Morgan can’t walk away from the deal even if Bear Stearns business and assets deteriorate further.

Fed wields its scissors, again

In economic news, the papers say markets are expecting the Federal Reserve to cut interest rates today by at least a half a percentage point and as much as 1.25 points. Or as the FT paradoxically puts it, “by as much as a full percentage point or more.”

Bloomberg says the move is likely to be the biggest since 1984 when Paul Volcker dropped the rate by 1.75 percentage points (to a low, low 10 percent). A point-drop now would bring the Fed’s benchmark interest rate to 2 percent, raising yet more concerns about inflation.

(But some key measures of inflation showed major drops yesterday: Crude oil prices fell more than 4 percent to $105.68 a barrel while a Goldman Sachs index of raw-materials prices had its biggest daily drop in three years.)

And don’t forget the cash drop that’s actually falling in taxpayers’ pockets. The government checks start fluttering into electronic mailboxes the first week of May, says the NYT. Nothing like trying to solve a debt crisis by getting the entire country into more hock so it can buy Blu-rays and stuff to give the economy a sugar shock.

Manufacturing data was recessionary last month, with industrial production dropping 0.5 percent. The New York Fed says its state manufacturing survey is at its lowest point on record. Trade data were good, however. The current-account deficit narrowed last month by 2.5 percent.

The Journal says on B1 that CEOs are worried the financial-sector woes are spreading to other sectors.

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.