The Rumormongers Who Brought Down Lehman: Heroes?Rumors: did they take down Lehman? This was one of those nagging questions to which we were too overwhelmed to answer yesterday. Now we know: Yes and no! On the one hand, as both rumormonger David Einhorn and pretty stiletto-wearing former Lehman CFO Erin Callan could tell you, that is how capitalism works. You short a stock, you start a word-of-mouth marketing campaign about how, say, "Lehman is the new Bear," which translates roughly to "Lehman is the new venerable investment bank whose demise those terrible short-sellers and their malicious rumormongering will turn into a self-fulfilling prophecy," and, lo and behold, the shit happens. Of course…it doesn't happen if your company has a sane and convincing leader who can go on CNBC and say, "here, look at our books! Our firm has such robust ratios of cash and hard tangible assets to covenants and other accounts payable that it really doesn't matter what our stock price does because, familiar as we are with the pussy nature of Wall Street confidence and the easily-distracted myopic ephemera-addled lemmings who govern such day-to-day fluctuations, we've seen to it to inoculate our business from such attacks by stockpiling enough hard currency and solid — but also liquid! — financial instruments that we can weather a crisis of confidence without having to undermine our case by begging them for money!" Lehman had no such leader. And it had no such assets! The Rumormongers Who Brought Down Lehman: Heroes?One of the less-noted upshots of this whole Lehman mess is that maybe the Fed didn't give it the proverbial "Bear Hug" because it seemed like less of a victim of "scurrilous malicious rumors" than Bear Stearns did. And Bear had that pothead CEO! But Lehman seemed to have a victim complex about the rumors, as Andrew Ross Sorkin noted in July:
“I will hurt the shorts, and that is my goal,” Richard S. Fuld Jr. fumed. It was April, and Mr. Fuld was blaming short sellers, one of the most maligned tribes on Wall Street, for spreading rumors about Lehman Brothers, the troubled investment bank he runs. Shorts bet against stocks, and Lehman, they were whispering, looked like the next Bear Stearns.
A Wall Street Journal story the next week portrayed him — as Cramer did the same week — as more concerned with shaming promulgators of bad rumors than figuring out the extent to which they were true:
Lehman Brothers Holdings Inc. CEO Richard Fuld Jr., whose firm's shares also have been battered, also has contacted Mr. Blankfein. "You're not going to like this conversation," Mr. Fuld told Mr. Blankfein, according to people familiar with their talk, but he was hearing "a lot of noise" about Goldman traders who allegedly spread negative rumors about Lehman. In recent months, Mr. Fuld has contacted traders he felt may have been bad-mouthing his stock, according to someone familiar with the matter. Spreading rumors one knows to be false with the intention of manipulating a public company's price is illegal.
The thing is, while Lehman seemed to have an army of friends willing to discredit the rumors at the risk of looking totally fucking ridiculous:
Absurd rumors can have legs, like the Lehman-Barclays one, which Richard Bove, an analyst at Ladenburg Thalmann, said “ranks up there with the moon is made out of green cheese in terms of its validity.”
(The specific rumor in question, and the subject of the Sorkin piece, was that Lehman might be acquired by Barclay's in a "take-under" whereby the British bank paid a discount to Lehman's stock price. Barclay's is currently in talks to do essentially that, with a whole lot less headache!) But here's the big thing: Lehman had the nicest, most polite short-seller in David Einhorn. He made his short position public, for god sakes.
Very few people publicize their shorts, and when Einhorn did, it got Lehman’s attention. The conversation with Callan was to give her a chance to explain discrepancies he had uncovered between the firm’s latest financial filing and what had been discussed during its conference call about that filing… She was evidently not prepared for the complexity of Einhorn’s questions and tried to bluff her way through. “The conversation was reminiscent of the ones I had with Allied,” says Einhorn. “We had our questions, we were organized, but she was evasive, dishonest. Their explanations didn’t make any sense.”
Dear Lehman, Sarah Palin can do this because she is talking to people who don't have money. (And will have even less when she is through with them!) (Related: someone could use a better shade of lipstick!) In the meantime, the shorts and their self-hastening prophecies perform some of the last remaining regulatory functions on Wall Street, and in the aftermath of Enron I will never understand why they are so maligned. Doesn't Wall Street, like the post-9/11 Justice Department, need someone to poke away at its hubris, its secrecy and its destructive tendency to act as if it can impose its will all the time with impunity? Which is to say, the rumormongering shorts are so widely detested because they are like the media, only with money. Short Interest Data: Lehman, AIG, Merrill [Seeking Alpha] Pssst! Hear The Rumor Of The Day? [NYT] Why Did David Einhorn Publicly Attack Lehman Brothers? [NYM] Fear, Rumors Touched Off Fatal Run On Bear Stearns [WSJ] The Man Comes Down On Rumormongering [Daily Intel] Goldman Sachs Accused Of Rumormongering [NYM]