Lehman Thinks Bank Bonds are Cheap

Fixed-income analyst Ashish Shah of Lehman Brothers has put out a report this morning urging investors to buy bank debt. "The Fed has finally intervened with overwhelming force," he writes;

the regulatory authorities now understand that the time for half-measures is at an end. With today's moves, the Fed has signaled a major campaign - and we believe the Fed will win the liquidity battle...
in our 2008 outlook, we stated that we believed 2008 would provide the best buying opportunity in financials in the past decade. For the reasons mentioned above, we believe that that opportunity has now presented itself.

Note that Shah is talking about bonds here, not stocks. I'm inclined to agree with him: if the Fed wouldn't let Bear Stearns default, it's unlikely to let other banks default either.

On the other hand, the report does come from Lehman Brothers, the one bank which has the most to gain from a rally in bank debt, and the most to lose if bank spreads continue to widen. Buying bonds at this point is only for the very strong of stomach.