Why Lehman Can't Go Private

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Speculation, rumor and anonymous reports that the management of Lehman Brothers might take the company private pushed the company's stock up 6.6% yesterday. But a management buyout at Lehman is extremely unlikely. Indeed, Lehman probably can't go private in this era of fear and balance sheet loathing on Wall Street.
It's not just that raising the money or finding a partner for the buyout will be difficult. The deeper problem is that taking Lehman private could trigger the kind of modern day run on the bank that crippled Bear Stearns.


Bear Stearns was brought down when creditors and counter-parties to trades lost faith in the institution. They began refusing to provide new credit to Bear and withdrawing their business from Bear. For a modern investment bank and trading house, this is the equivalent of customers withdrawing their deposits from a bank. Credit is the lifeblood of an investment bank. When the counter-parties and other creditors flee, the bank quickly discovers it lacks the funds to operate its business.
Going private would solve one problem at Lehman, removing the pressure of short-sellers and skeptical shareholders. But it would create another, perhaps more serious, problem. Without public shareholders, SEC reporting requirements and a listed stock price, Lehman counter-parties would find themselves without market signals about the health of the bank.
In happier times, this lack of market signaling and outside investor oversight might not be a barrier to a management buyout. But when Wall Street is wracked with bearish sentiment and fear of hidden liabilities, increased opacity is a recipe for creating more doubt among counter-parties. Going private, by foreclosing checks on risky behavior by Lehman Brothers, could trigger a flight of counter-parties to rival firms still subject to market discipline.
The fear of counter-party risk from trading partners and creditors, then, most likely will prohibit any going private transaction at Lehman. As painful as it might seem to Lehman's management to remain to the mercy of public markets they believe undervalue their firm (in part thanks to misleading rumors and reckless short-selling), the alternative risks wiping out the firm.

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