If It’s Such Good News For Lehman And Overall Stock Market, Why Did Lehman Shares Fall?

I’ve long had my doubts about the intellectual capabilities of most equity traders.  Thursday’s late market action only reinforces those concerns.

My question is: If the late-breaking Wall Street Journal report highlighted below was such good news for Lehman Brothers (LEH) — and, apparently, the overall equity market, which spiked higher into the close — why did the investment bank’s stock close down 41.8 percent ?

Here’s a little graph I put together (courtesy of Bloomberg) which sums up what happened during the session):

Maybe it’s because those who actually took time to read the story noted its many caveats? Like, for example, the fact that “potential buyers remain wary about plugging holes in Lehman’s balance sheet, and are increasingly looking to the U.S. goverrnment to help backstop future losses.”

In other words, as long as the government guarantees that prospective buyers will come out ahead, we could see a deal.

Ahhh. Now I get it.

Anyway, here’s the WSJ report, entitled “Lehman Brothers in Sales Talks; B of A Seen As a Potential Suitor”:

Lehman Brothers Holdings Inc. is actively shopping itself to potential suitors, including Bank of America Corp., people familiar with the matter said Thursday.

The need for a sale intensified as Lehman’s shares dropped 45% in Thursday trading, creating new doubts about its ability to trade with other Wall Street firms while keeping its best talent.

But potential buyers remain wary about plugging holes in Lehman’s balance sheet, and are increasingly looking to the U.S. government to help backstop future losses, according to people familiar with the talks.

A number of these buyers would “come out of the woodwork,” if the U.S. were to step in, said one person monitoring the process. It remains unclear whether the U.S. Treasury or Federal Reserve would take such steps, as was done when the government assisted J.P. Morgan Chase & Co. in its Bear Stearns takeover in March.

Bank of America, which is holding preliminary discussions about a transaction, appeared to be Lehman’s best hope on Thursday afternoon. BofA may only do a Lehman deal if it is encouraged by the federal government, since it has its hands full digesting mortgage lender Countrywide Financial Corp.

Still, the situation was so fluid Thursday that people involved in the deal talks said it was too soon to say what shape a sale would take or if it would happen at all.

Without explicit government support, a range of other suitors have proven uninterested in absorbing Lehman and its $600 billion balance sheet. Goldman Sachs, for example, is not bidding on the company, said a person familiar with the matter. Other much-discussed buyers, including France’s BNP Paribas SA, the UK’s HSBC Holdings PLC, Germany’s Deutsche Bank AG, Spain’s Banco Santander SA, are not expected to participate.

One outside potential remains Barclays PLC, the UK’s third largest bank which has been eager to expand its investment-banking franchise around the globe.

After rallying some in the afternoon, Lehman shares again retreated before the market close, swapping hands at just about $4 each.

Speaker of the House Nancy Pelosi (D., Calif.), said Thursday that Lehman Bros.’ impact on the credit markets would have to be evaluated before the federal government moved to pull together a rescue package for the troubled investment bank.

Ms. Pelosi said the key question for any financial institution would be its impact on the credit market, the wider financial markets and on consumers more generally. Ms. Pelosi did not answer directly whether the government should step in to bail out Lehman Bros. if the bank fails.

Outside Lehman’s midtown Manhattan headquarters, employees taking lunch breaks or a few minutes for a smoke early on Thursday afternoon discussed the firm’s future. Many sounded dazed. “It’s over, man… unless we get bought out in the next 24 hours, it’s over,” said a young man, in conversation with someone on his cell phone. He declined to identify himself.

At a fast-food vendor across the street, people waiting to order food discussed the dive in Lehman’s share price this week, and the latest headlines from CNBC. Outside, a group of three men, wearing Lehman badges and walking back into headquarters, discussed the fallout for other firms on Wall Street. “At some point, where does it stop?” one said, on his way back to the office.

Lehman Brothers did not immediately respond to a request for comment.

(P.S.: Not long after the market closed, Lehman’s shares fell another 23 cents to $3.99. Oops.)

Posted in Categories: Contributor, Eurozone, External Research, Financial, Stocks, UK, USA.

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