NEW YORK -- If the gauge of Wall Street's confidence in Lehman Brothers is its stock price, then the shares' gyrations this past week indicate investors are both petrified of a collapse and encouraged about a possible buyout.
The stock price of America's fourth-biggest investment bank bounced wildly as investors laid bets on its future. That volatility is actually a positive sign to some on the Street -- that the stock is trading heartily signals that Lehman Brothers still has a number of options to avert the kind of near collapse that vanquished rival Bear Stearns Cos.
Analysts say the stock price has already factored in a possible $3 billion to $4 billion write-down when Lehman Brothers posts third-quarter results in mid-September. They say the fact that shares haven't gone into a total freefall shows the market's confidence that Lehman will indeed emerge from the current crisis -- though perhaps not still independent or in one piece.
"The very business model of independent investment banks is coming under fire," said Octavio Marenzi, president of financial consulting firm Celent LLC. "This is a reminder that the days of the standalone investment bank are numbered, and that they must increasingly align themselves with universal banks to survive."
That's what happened when JPMorgan Chase & Co. bought Bear Stearns in March. But, there are big differences between the situations faced by Bear Stearns and Lehman Brothers.
Bear Stearns was waylaid by a number of events: Trading partners began pulling their business in a run on the bank, rumors of a collapse caused investors to bail out and a crisis of confidence in its leadership peaked.
The 85-year-old investment bank -- whose shares were once worth $133.20 -- was sold to JPMorgan for $10 each. Analysts said after the deal was completed that many of Bear Stearns' businesses were rendered almost worthless by the credit crisis that has caused more than $300 billion of write-downs to banks globally.
Lehman has been under scrutiny because, with about $60 billion in risky mortgage-related securities, it remains Wall Street's most vulnerable investment bank. However, while businesses such as debt underwriting remain hamstrung because of the market dislocation, other units have remained in fairly good shape.
One thing the market has demanded from investment banks is to have plenty of capital on hand to shore up its balance sheet, and that's where Lehman might be running short of options. The company already has tapped outside investors and issued more equity, and the next step seems to be asset sales.
Merrill Lynch & Co. is selling its stake in business news and data provider Bloomberg LP, while Citigroup Inc. is unloading its German banking unit. There have been widespread reports Lehman Brothers is shopping around its asset management business, which includes the prized Neuberger Berman unit.
Chief Executive Richard Fuld mailed out letters to private equity firms this past week to gauge how much the investment-management business might fetch should he need to raise capital, according to two people with knowledge of the letter who requested anonymity because they were not authorized to speak publicly. No decision was seen as imminent, they said.
There have also been reports that Fuld rejected investment offers from South Korean sovereign wealth funds because they undervalued the firm -- and that has triggered speculation Lehman might be the target of a hostile takeover. Landenburg Thalmann's Richard X. Bove believes Fuld's high asking price might prompt potential acquirers to sway battered shareholders to cash out before more losses are incurred.
"Investors are unwilling to accept any positive view of the company; management is unwilling to sell out at a deeply distressed value," Bove said. "The stage is set for a hostile bid to take over the whole company."
And there are reports that Lehman has enough capital to keep going for the short term in hopes that the market might turn back in its favor, and thus avoid selling assets at a deep discount.
Jeffrey Harte, an analyst with Sandler O'Neill, believes the company can rely on the $6 billion of capital raised during the third quarter. However, he believes that "management may have more capital than time on its side."
"There will be a time to buy Lehman shares, but that time has not yet arrived," he said. "Solvency concerns, like trading errors, do not age well, and we believe that the longer the market frets about Lehman's balance sheet exposures, the more likely counter-parties are to pull back from the firm, which could cause lasting damage to its franchise."
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