The Scare At Lehman: Like A Dress Rehearsal For A Run On The Bank

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Today's scare at Lehman Brothers showed us all what a bank-run would look like. The stock plunged 22% while credit default swaps blew out to deathwatch levels. The basis of the scare were a pair of rumors that started circulating yesterday, namely that Pimco and SAC Capital were pulling out of trades with Lehman Brothers because of counter-party risk. Both Pimco and SAC acted quickly to deny the rumors, although skeptics will no doubt parse the denials for hidden verbal escape hatches. Lehman stock recovered to a dime or so above where it had opened.
We're pretty sure the "jail the rumor-mongers" crowd will be heartened by today's events. But they shouldn't be.

On the face of it, it looks like Lehman was victimized by a false rumor. But we're not so sure that the lesson some seem to be taking from all this criticism of rumor mongering is the right one. CNBC's David Faber publicly declined to explain the content of the rumor, even as the stock was down around 15% and dropping. Investors far removed from Wall Street gossip circles were left wondering why Lehman's stock was dropping so quickly.
Everyone who has picked up the New York Post knows what a "blind item" is. But for those of you dialing into the calls from abroad, it's where a gossip item tells you what an unnamed celebrity did but leaves the identity up to the reader to guess. Faber today employed the rarely seen "reverse blind item" in which you get the name but not the action. Imagine if Page Six ran items like: "People are talking about Kirsten Dunst" and that's it. People who could get in would know that she made out with a DJ at Beatrice Inn. Everyone else would just have to guess or wonder.
Wouldn't it have been more responsible to simply explain the content of the rumor that was moving the market so rapidly? Reserving this kind of information for Wall Street insiders hardly seems a way to bolster confidence. What's more, in today's age of nervous investors, it's likely that many thought something far worse might be in the pipeline. A pending bankruptcy? A default on its bonds? With holding information from outsider investors seems a recipe for panic.
We're not saying that every rumor is fit to broadcast. We send most rumors we get directly to the circular file. But when a stock has fallen as far as Lehman's did today, don't investors have a right to know the details? CNBC admirably recovered from their tight-lipped behavior this afternoon by bringing on Pimco's Bill Gross and running Charlie Gasparino's report of SAC Capital's denial. But for several hours CNBC insisted it's viewers couldn't handle the truth about what was moving the stock. They didn't report, they decided.

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