Monday, June 30, 2008

Barclays and Lehman? Seriously?

I've heard some crazy Lehman rumors in my time, most of them true, but the rumor du jour circulating about Barclays evaluating a take-under of Lehman may take the cake.  Lehman received yet another drubbing in the market today for seemingly no reason, ending the session below $20, an eight-year low.  Bloomberg reported that this particular beatdown in the stock was attributed to speculation among traders that Lehman was going to sell itself at a below-market price to some bank.  Reuters claimed that one version of the rumor pointed at Barclays buying Lehman at $15.  Although referred to as a "take-under", if the stock continues its spiral downward at this velocity, $15 will appear to be a very attractive premium by the end of the week.
When I first hear a crazy rumor such as this one, I instinctively instant message or call every trader I know and ask if he's heard the rumor, thus contributing to the spreading of the rumor without really knowing the origin or having any facts to support the supposition.  As I spent all day today in a courtroom hoping I wouldn't end up as a juror on a one-month murder trial, I didn't have a chance to engage in any rumormongering.  Inspired by the strict instructions handed down by the judge for the murder trial, I have decided to look at the evidence before jumping to any conclusions:
I would like one of the rumormongers out there who actually believes this one to explain to me why a bank that just raised nearly $9 billion in capital because it had one of the lowest Tier 1 ratios of any European bank, would immediately spend that fresh cash to acquire a US investment bank caught in a vicious death spiral.  Barclays is already in the US investment banking business.  There is just too much overlap for the deal to make any sense from an operational perspective, which would imply that Barclays is interested in scooping up Lehman's assets at a discount.  Yeah, I thought that was funny too.  Who knows what those assets are really worth?  Maybe David Einhorn, but he's not telling until he's finished covering his short.  
From Lehman's perspective, it makes absolutely no sense that Dick Fuld would be looking for an opportunity to sell the bank at $15 a share a mere three weeks after he just raised money at $28 from a slew of supposedly savvy institutional investors.  That would absolutely put the final nail in Lehman's credibility coffin.  Because if Mr. Fuld was shopping the bank around at $15, the implication would be that Lehman is having counterparty or liquidity problems.  In that case, it would be better to wait for the opportunity to buy Lehman at $2 with the Fed promising to take the first $30 billion in losses. 

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