Commentary: Pssst … rumor is truth on Wall Street
By David Weidner, MarketWatch
Last update: 12:01 a.m. EDT July 15, 2008
NEW YORK (MarketWatch) — Wall Street, like a girl in junior high school, has come home crying.
It seems the Mean Girls in the marketplace keep spreading nasty rumors, and everyone’s cell phones are alight with SMS messages. “OMG did you hear Bear Stearns can’t meet its obligations?” they whisper. “Fannie (FNM) and Freddie (FRE) r FSBO.
“B4 the credit crunch Lehman used 2b QT, but has toxic balance sheet; it could go BNKRPT b4 2MORO,” they snicker.
The Mean Girls buy a bunch of short positions and then collect when the stock tumbles. On June 10, there were 90,000 puts in the first hour of trading in the option market against Lehman shares, after a rumor was floated that Pimco had pulled its business from the investment bank. Even though Lehman Brothers Holdings Inc. (LEH) has been a big put stock in recent weeks, the puts represented two-thirds of the average daily volume for the stock.
Until Pimco shot down the rumors, it was BBB (bye-bye, baby) for LEH.
News travels pretty fast around here. Text messages, cell phones and the old face-to-face method are the shovels used to move dirt. If recent insider cases are any indication, text messages and emails remain popular even though they are recorded.
It’s been a scandalous spring, but now the Mean Girls are getting some payback. First they’ve been exposed by Bryan Burrough in the latest issue of Vanity Fair. In that article, Burrough alleges that rumors either were transmitted to or originated from hedge funds SAC Capital Management, Citadel Investment Group and traders at Goldman Sachs Group (GS) . He suggests that Bear Stearns may have been ruined by rumors, a tactic that some call a “Bear raid.”
Burrough even quotes an executive at a Bear rival who says the rumor campaign was “the biggest financial crime ever perpetuated.”
Things have become so bad that even most popular kids on the Street have complained. Jamie Dimon, J.P. Morgan Chase & Co.’s (JPM) chief executive, told Charlie Rose last month: “I think that if someone knowingly starts a rumor or passes on a rumor, they should go to jail.”
Luckily, Christopher Cox at the Securities and Exchange Commission has promised to thrash any of the bullies that try to trash his BFFs on Wall Street. The SEC along with the New York Stock Exchange’s regulatory arm and other regulators are going to examine oversight of information-sharing on Wall Street.
The penalties could be severe, and Cox just may read confiscated notes in front of the class.
Not everyone, however, has been caught in the middle of this catfight. A few of us observers, analysts and investors have been getting our own information about the Bears and Lehmans of the world.
For instance, did you hear the one about Bear Stearns at the end of fiscal 2007? They gave an estimate 4 the Q4 of a $1.2 billion write-down to the mortgage portfolio; it turned out 2B $1.9 billion. NTHING, in fact, looked good for Bear in the months before its collapse.
Though it had a liquidity pool of $18.1 billion in the days before counterparties began calling in their loans, Bear’s ratio of assets to equity was 34 to 1. Conservative investments were MIA. Bear financed about 26.2% of its leverage in the very risky repo market, nearly twice the rate of Goldman Sachs, according to an analysis on April 9 by Seeking Alpha.
How about Lehman? Dick Fuld, the “gorilla” and chief executive, warned in April he would “hurt the shorts.” Turns out he might not have meant short sellers, but the shorts of investors after Lehman reported a $2.8 billion loss on June 16. Shares fell 23.5% during the next five days.
Lehman carried repo leverage at nearly the same rate as Bear. At the end of May, Lehman reported that it had reduced exposure to risky assets by 23%, but its balance sheet included $24.9 billion in residential mortgages, $39.8 billion in commercial mortgages and $6.5 billion in other asset-backed securities.
No wonder investors were wondering: “RUOK? Can Lehman make next earns D8?”
Here’s an XLNT plan
In other words, the truth is Wall Street firms that blame the rumor mill and a crisis in confidence are ignoring the real issue at hand: They are vulnerable. Instead of whining about short sellers, maybe the big banks should MYOB by raising more capital and reducing risk.
It’s the same old FAQs. Why did Mean Girl targets such as Lehman, Fannie, Freddie and Merrill Lynch & Co. (MER) leave so much leverage on the books, or have no plan B for when the mortgage boom was over?
Management missteps at those firms sealed their F8, made the companies defenseless against the TLK.
Would any of these firms be vulnerable if their houses were in order? Rumors don’t have to be exactly true to do their damage; they just have to be believable.
But no, Fuld, Dimon and Cox are trying to use the power of government to threaten traders. Market disinformation was fine when it was the trading desks at Bear, Lehman and Merrill that were benefiting at the expense of public companies and public investors.
The audacity is enough to make someone LOL.