The latest buzz is that the shorts conspired to drive down the stock of Lehman Brothers (LEH). A story in today’s Wall Street Journal today says the company has met with the SEC trying to track down rumors of its imminent (before Monday's $3 billion preferred share sale) demise.
Of course, a few weeks ago you cold have replaced the name Lehman with Bear Stearns. As I wrote in my latest column on MarketWatch and in the Journal:
Accusations flew across Wall Street accusing hedge funds of shorting Bear stock and then conspiring to drive it down by pulling their accounts. This may ultimately turn out to be true, but it doesn’t disguise the fact that Bear was the riskiest player in a risky industry during a very risky time. Successful short-sellers figured this out before everyone else.
Lehman may not have been the riskiest, but away from conspiracy theories, its fundamentals were clearly fair game for short-sellers, especially in an environment like this. Could there have been a conspiracy among shorts? Sure the same way there might have been a conspiracy among longs when critics of financial stocks were being dismissed as crackpots as the current crisis was evolving. (Not that anybody would cry conspiracy when stocks are rising.)
In the end, the banks are responsible for their own troubles. It's hard for these banks to blame anybody but themselves for taking a risk by levering a balance sheet with what are now believe to be risky assets. Its no different than a hedge fund that bets wrong, with one difference: The funds cant go back to their investors and cry, conspiracy.