Watching the Lehman Fireworks

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Includes: AC-OLD, BCS
by: Felix Salmon

I'm thinking it was maybe a good thing that I was off the grid for most of today; it meant I haven't been able to get caught up in all the Lehman Brothers (LEH) hysteria. Of course, there's lots of speculation about what may or may not be going on -- but substantially all of it seems to be driven by the share price, rather than the other way around. The stock closed at $7.79 a share, down 45% on the day.

Can a move of that magnitude be explained by the fact that Lehman isn't being sold to the Korea Development Bank? That would imply that a sale had been fully priced in until today, which seems improbable to me. Most of the price action is a much simpler story: a vicious cycle in which a falling share price makes Lehman look untenable as a going concern, which causes people to sell, which drives the shares down even further.

Bravely, Lex is taking the contrarian stance.

There is little reason to believe Lehman is destined to go the way of Bear Stearns - even though the cost of insuring against default on Tuesday jumped by over 100bps. The bank has raised almost $12bn in new capital this year, more than its current market capitalisation. It retains value through its prominence in fixed income. Most importantly, unlike Bear, it already has the authorities standing behind it, through its access to the Federal Reserve's funding window.

Dealbreaker's John Carney tells me he heard that the selling in Lehman was driven by Barclays (NYSE:BCS) and Alliance Bernstein (AC-OLD) selling shares in bulk, maybe after they lost a huge amount of money on Frannie (FNM)(FRE). Whether or not that's true, this market is certainly nervous and volatile enough to sell off dramatically in the face of a couple of monster sales. Volume was over ten times average today -- high enough that it would be pretty much impossible to account for without major institutional sales.

I feel as though this is the point at which I should put forward a nice little theory of my own: It's too late, the game's up, Lehman's going to zero. Or: Today was the panic-selling bottom, Lehman's a screaming buy. The fate of the bank will be determined in the next 48 hours: At that point it will be obvious whether it can survive or not.

But frankly I haven't got a clue what's going on, what it all means, or where Lehman might be headed. And most of the pundits? Are in exactly the same boat. All we can really do with any honesty is sit back and watch the fireworks, along with everyone else.