The Crazy Lehman Share Price

Lehman Brothers (LEH) looks as though it's going to sell its asset management arm, Neuberger Berman, for a sorely-needed $10 billion or so. That's got to be good news for the stock, right? No: Lehman shares are down more than 10% today, and its credit default swaps have gapped out as well.

There's no doubt that if Lehman shares had risen today, everybody would know why. But the fact that they're down puts financial journalists into a quandary: They have to pretend that there's some reason, and the best they can do is "writedown fears".

That said, DealBook has a good post today on why selling Neuberger might be a bad idea for Lehman: It could harm the bank's credit rating, send its compensation ratios soaring, and make future cashflows almost impossible to predict (and therefore to price). "Selling the unit would be tantamount to selling a ship's anchor in the midst of a storm," says the piece, citing no one in particular.

And the "writedown fears" reason isn't as silly as it looks at first glance: Lehman's drop of $1.66 a share today is smaller than the per-share losses that the likes of Kenneth Worthington are now forecasting in the third quarter.

But my feeling is that there isn't a reason -- certainly not a nice clean easy-to-fit-into-a-headline one -- why Lehman's stock is tanking today. Sometimes stocks move and we know why. More often, stocks move and we don't know why, which doesn't stop journalists from guessing. And sometimes stocks move for no particular reason at all -- especially when they're surrounded by uncertainty, they're highly leveraged, and there's a good chance that the CEO will be out within a month.

Comments

[Kells]

If you like a good conspiracy theory, the sell offs in Lehman, Fannie and Freddie seem to be happening after the SEC naked short rule expired. Aritcles talking up their demise are authored by those who seek to benefit directly or indirectly from shorting. The Barrons article was really a a means to end for hedge fund managers to get back on the short wagon and ride these stocks down to oblivion.

[PhinT]

Kells…. Amen
All I am looking for is a straight story here… Humm, Barons, Greenspan along with the banks, brokerage houses, naked short and “news releases” seem to have a “special” interest/manipulation in seeing LEH, F&F bust… I think there needs to be a federal investigation to what is really going on here….The cheese is stinky!!!

[Ice]

Agree Felix; it is annoying to think that we always need an explanation.

The main reason why a stock goes down however we do know;

Because there are more sellers than there are buyers.

The rest is for historians not for a day by day Talking Head(s).

Doesn't the word Head have an other mean - think nautical.

[SnPTrader]

There is no conspiracy. The sell off is because their portfolios are risky. Fannie, Freddie are government pawns used to prop up the housing market. LEH, like so many other investment banks, got caught like snake oil salesmen selling product that was generating millions of dollars in fees and now they want to be victims. How about the 10,000s wanne homeowners who should have been renters? These people, some very unsophisticated where offered loans that would not have past the sniff test 15 years ago. They have my sympathy not the investment bankers. Now the shareholders of the investment banks are suffering. I feel your pain but the culprit is not some special interest group, it's the government, bad policy (fox in the henhouse regulators) who allowed this to occur to prop up Wall Street (remember Paulson was the Man at Goldman). Paulson, Bernanke etal get air time to assure investors/ the world that the US government will stand behind this mess. Yeah, print money (WHOOSH goes the value of the USD), oops not print just bonds that the taxpayer will payoff in 10 - 30 years. Oh, yeah the taxpayer doesn't want any taxes so we'll end up printing the money. We've been living on leverage, read debt, now we need to pay. We need some Volcker sense to stop this nonsense. You can't spend your way out of this.

[icandoitdon]

these companies being hit have one thing in common...inadequate levels of capital for the leverage they employ. they are either approaching (LEH) or are at (FNM FRE) stock price levels where raising capital is impracticable because of the extreme dilution that would be required to make capital raising meaningful or because markets are unwilling to provide it at any price.

a financial crisis will always kill off the weakest players and that's what's happening here. wachovia might well come next. paulson and bernake can do nothing about it unless, of course, they're willing to take majority stakes in these companies. i'm not sure that's what bush and his cronys quite meant when they talked about the importance of having an "ownership society."

[MattDC]

Have to agree with SnPTrader and lcandolton.

Bad numbers, such as are released to the market, the rest assumed in suitably scary way, are driving the stocks down. Why? Opaque market actors in crisis do not trust imperfect information, esp at ugency; opaque markets on the up inspire irrational exuberance. We're simply seeing the down from the previous up, but perhaps correctives are sharper and swifter? Should the rules change? I don't think so, not mid-game.

I think we've got to focus more on the psychs of the players. For instance, the Victorians used to make stark distinctions between the deserving and the undeserving poor. What do the policymakers think of the deserving and undeserving banks, their positions and exposures, their labour force, and with what implications for policy and investors? This is not academic: Bernanke and FDIC have to decide on who fails without bailout and why, and how it's portrayed. And whether what they prescribe wroks.

M

[bearfund]

icandoitdon writes: "'m not sure that's what bush and his cronys quite meant when they talked about the importance of having an 'ownership society.'"

I can tell you. They're worried about alienation. Alienation is what happens when substantial numbers of citizens start feeling that they have nothing invested in their society, that it needs them more than they need it. Alienation destroys confidence, breeds disorder, and leads to the total and permanent collapse of governments. They believe, correctly or not, that people who hold a mortgaged title to their residence will not be alienated by the government's various actions. Personally, I think they are wrong - by encouraging people to own their homes at artificially high prices and artificially low rates, backed up by a guarantee only as good as the money taken from me at gunpoint, they are actually increasing alienation. But what do I know?