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In the legal world, an incredibly illogical argument is said to “not pass the laugh test.” Last week an anonymous source told Reuters that the Korean Development Bank had Lehman (LEH) on their watchlist. LEH and shares of other financials rallied nicely on the news. However, no one stopped to question the absurdity of a savvy prospective buyer literally showing its cards to the entire world.

For those who did not take Econ 101 or Negotiations 101, here’s a quick primer:

If you are going to bid on an asset, do not tell anyone because then those people will buy in anticipation of the bid. As a result, the price will increase proportionally with increased demand, and you will be forced to pay a higher price for the same asset.

In this case, we are supposed to believe that a major financial institution would rather have everyone and their grandparents bidding up shares of LEH so Korean Development Bank could pay a higher price than they otherwise would have if they simply kept their mouth shut. For example, if the bank was planning to offer a 15% premium for LEH, they can either offer that premium on $12 or less, or they could offer that premium on $14 or more after alerting the entire world of their plans.

I honestly feel sorry for the average person who is investing their savings in the stock market on the bare trust that the financial media and SEC are actually doing their jobs. I’m glad longtime readers never buy on absurd rumors, but I can’t imagine how many hard working middle class folks bought LEH last week and are sad to see the results today. When Wall Street PR spin doesn’t pass the laugh test, those who are laughing hardest are those laughing their way to the bank as they pass the bag.

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Source: Lehman Buyout Rumors Flunk the Laugh Test