Lehman Fends Off Nasty Rumors, Lives to Fight Another Day

Yesterday, as Lehman's stock was getting pummeled for the third day in a row, a rumor started circulating that Lehman was borrowing heavily from the discount window because it was having trouble obtaining financing from its lenders. Just as I was about to risk an SEC investigation of rumormongering by posting the rumor, Lehman's treasurer made a statement adamantly denying the rumor, claiming that the firm had not used the discount window since April 16th. The stock rallied back, only to sell off again into the close. However, a far more interesting and insidious rumor, that Lehman was buying its own stock on the dip, turned out to be true. Although many view a stock buyback as a sign of confidence by management, I happen to have a different opinion. Highly leveraged institutions, particularly those who are actively seeking fresh capital should not be buying their own stock. It is a waste of much needed liquidity. Given that Lehman is in a position where it has to defend its liquidity position every day, this move can almost be viewed as desperate. Sure they have $40 billion in liquid assets, but Lehman also had, as of the end of the last quarter $197 billion in repos on the liability side of the balance sheet. In English, Lehman depends on nearly $200 billion in short term financing, some of it overnight to finance its operations. While $40 billion sounds like a nice round number, it's not that much when put in context. If management wants to show confidence, why doesn't Dick Fuld spend his $40 million bonus from last year to buy some "cheap" Lehman stock? Mr. Fuld has always been considered a very shrewd investor, but I hear they don't call him Dick because his first name is Richard.
Needless to say, the action is set to continue for another day, if the options and credit default swap markets are any indication. Although Lehman hasn't tapped the discount window yet, we may be hearing a different story by the end of the week. Bernake will be waiting for them with outstretched arms, but hopefully with an admonishment or two..."yes, we'll give you money but seriously, stop buying back your own stock..."