Troubled Lehman

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.

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 free fall 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. "This is a reminder that the days of the stand-alone investment bank are numbered, and that they must increasingly align themselves with universal banks to survive."

That's what happened when JPMorgan Chase 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 stock was once worth $133.20 -- was sold to JPMorgan for just $10 a share. After the deal, analysts said that many of Bear Stearns' businesses were rendered almost worthless by the credit crisis that's already caused more than $300 billion of write-downs to banks globally.

Lehman has been under scrutiny because, with some $60 billion in risky mortgage-related securities, it remains Wall Street's most vulnerable investment bank. However, while businesses like 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 to shore up their balance sheets -- and that's where Lehman may be running out of options. The company has tapped outside investors and issued more equity, and the next step seems to be asset sales.

Merrill Lynch is selling its stake in business news and data provider Bloomberg, while Citigroup 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.

There have also been reports that Chief Executive Richard 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.

"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."