(FORTUNE Magazine) – If you think the market shakeup has erased a big slice of your wealth, check out Richard Fuld, CEO of Lehman Brothers. In July, Fuld was sitting on more than $180 million in Lehman stock and options gains. But in just 13 weeks, that number shrank by--get this--more than $150 million. Fuld runs a medium-sized firm, but for vanishing wealth, he ranks right up there with the big guys. According to Compensation Resource Group, his paper losses put him in the same epic league as Merrill Lynch CEO David Komansky or Morgan Stanley's Philip Purcell.

The fall in the boss's wealth may seem like just deserts to Lehman's other shareholders. Since hitting an all-time high of $85 in July, Lehman's shares have dropped 67%, to around $28--canceling $6.8 billion in market value--making it the hardest hit by far of all the brokerage stocks. That massive selloff suggests that investors expect Lehman's future to be grimmer than the official news would indicate--and the official news is already pretty grim. After posting record profits in its second quarter (ended May 31), Lehman announced a 53% earnings slump. The reasons looked routine: With corporate bond prices falling around the globe, Lehman took trading losses of $60 million in emerging markets.

One message from this is simple: Investors burned by hedge funds aren't anxious to invest in a firm with a highly leveraged balance sheet loaded with junk bonds, mortgage-backed securities, and other volatile instruments, no matter how good the risk-management system is supposed to be.

But Lehman has a longer-term problem: Investors now fret that the firm won't have the time or the money to achieve its once vaunted diversification strategy. Orphaned from American Express in 1994, Lehman had recently appeared to be reinventing itself as a full-service investment bank for corporate clients, occupying a special niche between boutiques like Lazard Freres and behemoths like Merrill Lynch. Traditionally Lehman had been a powerhouse in the low-margin bond business--and almost nothing else. Fuld wanted to expand in lucrative areas like underwriting equities, advising clients on mergers and acquisitions, and selling junk bonds. That would not only build up Lehman's profits but would broaden its base as well, providing more stability in rough times. Eventually Lehman might even buy retail and asset-management arms, reclaiming turf it held before American Express sold off its Shearson unit to Travelers in 1994.

The roaring bond market gave Lehman plenty of profits to lavish on Fuld's plan, which by 1998 showed signs of working. Since last year Lehman has raided rivals to hire 50 new M&A bankers, and climbed from tenth in 1997 to fourth in Securities Data's worldwide rankings.

But now, with profits shrinking, Lehman's big plan is in danger. Even if it progresses in equities, Lehman will still be far less balanced than Merrill Lynch and Morgan Stanley, which get streams of fee income from retail and asset-management units. "At best, Lehman is trying to rebuild the best businesses it lost when Amex sold Shearson," says Richard Strauss, an analyst with Goldman Sachs. "The current problems are a big setback."

Lehman's official line is that its shares are undervalued. Management has announced it will repurchase an additional 7.5 million shares, mostly by the end of 1999. But recent actions by management send a different signal. Until recently Lehman had an unofficial policy that was reassuring to shareholders. It barred top officers from selling Lehman shares. But in May and June Lehman relaxed the rule, allowing Joseph Gregory, the head of equities; John Cecil, the CFO; and six other executives to sell more than $120 million of Lehman stock--right near the peak. Lehman says these executives needed cash because they're paid mainly in stock. In hindsight, investors wish they had sold too.

--Shawn Tully