Ever since the implosion of Bear Stearns in March this year, shrewd investors have been looking for the next institution under the Fed's hammer.

One name that has often sprung up is that of Lehman Brothers. There are no reasons to believe at this point that the firm founded in 1850 will go the Bear Stearns way. But it would be prudent to keep an eye on the company. If it goes down, it will have a cascading effect on our markets as well.

The company presents its quarterly credentials on June 18. Early in the week, the stock plummeted after rumours surfaced that it was borrowing emergency cash from the Federal Reserve to guard against the type of run-on-the-bank that torpedoed Bear Stearns. The stock partially recovered after Lehman denied it had turned to the Fed.

One of the reasons why Lehman's name has cropped up often is that it is heavily geared like Bear Stearns. As per the last quarter filings, Lehman had a gearing of 31.7 times. In order to survive to live another day, banks and institutions often reduce their balance sheet size selling assets to repay liabilities.

While other financial institutions were busy reducing their balance sheet size in the first quarter, Lehman ballooned it up to $786 billion, a growth of 13.7 per cent.

Reports have appeared in the Western press that the firm has deleveraged to around 25X by selling assets worth $100 billion. There are no official releases on this. But to think that it will sell assets worth $100 billion without incurring losses is asking for a giant leap of faith. De-leveraging is not easy if the asset prices are under stress, whereas de-leveraging when the asset prices are high is child's play.

What the company has actually done will be known only when it presents its quarterly results next fortnight. But a section of the market believes that Lehman will post its first ever quarterly loss. As a result Puts have been bought at the June 25 and 30 strike prices. Volumes of the concerned puts have increased by over 10 times which indicates keen interest.

The company is also in the market to raise capital. Analysts expect $3-4 infusion in capital, which will result in 15-20 per cent dilution. This amount may be needed to fund losses incurred.

But what is astounding is that the company was seen buying back its equity from the markets the next day. How can a company need money one day and not need it another day? A buyback is done at a time a company does not have an effective plan to use available cash. If it has the cash then why is it raising capital?

One thing that may be kept in mind is that at the last annual general meeting in April, the CEO Richard Fuld had declared that "his goal was to hurt the shorts". So, was the buyback a ploy to tighten the noose on those who had borrowed the stock and shorted?

The US markets have recovered on account of better May retail sales, which could be attributed to tax refunds sent out to stimulate the economy. With the US Fed now in a hold mode, the environment for credit will start to deteriorate.

Housing demand continues to play truant largely because potential buyers are holding back as they fear a further slide. Demand could ramp up fast once the prices find a floor. But that does not seem to be an immediate possibility.

Crude will no more be a mere inventory game from June onwards as the official hurricane season begins this week. So keep an eye on them as well apart from looking for the next shoe to drop in the US.