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Lehman Rebounds on Buyback Report

Dan Freed

Shares of Lehman Brothers(LEH Quote) rebounded after opening lower Wednesday, as investors digested a report that the firm bought back "large amounts" of its own capital during this week's swoon, according to The Wall Street Journal.

In early trading, Lehman's shares dipped as much as 9.1%. By the close, however, the stock traded 2.6% higher to $31.40, perhaps also in part due to an upgrade from Merrill Lynch (MER Quote). The stock has fallen as much as 24% this week as the firm mulls a plan to raise some $4 billion and prepares to report a quarterly loss later this month, the Journal reported on Tuesday.

Investors on Wednesday, however, responded positively to the buyback news, also reported in the Journal. The move ordinarily is viewed as a sign that management has confidence in its own business and level of liquidity.

The selling pressure this week may be due to general panic -- a serious issue for a financial firm such as Lehman that must borrow money daily to open its doors for business -- or investor fears that shares will be further diluted. Even as Lehman was buying back shares, it is looking for new investors to come in and inject fresh equity into the firm, according to reports in Journal and the Financial Times.

One interested investor, according to the Financial Times, is CV Starr, the investment fund run by Hank Greenberg, former chairman and CEO of AIG (AIG Quote), the world's largest insurance company. The Journal reported that Lehman made an overture to at least one South Korean investor, possibly Korea Development Bank or Woori Financial Group.

Because it has a business model comparable to Bear Stearns, which had to be rescued by the Federal Reserve and sold at a cut-rate price to JPMorgan Chase (JPM Quote) in a deal that Bear shareholders approved last week, Lehman is particularly vulnerable to negative swings in investor sentiment. Lehman is also now the smallest of the major investment banks, following the sale of Bear.

The latest concerns about Lehman have been stoked by a negative publicity campaign by David Einhorn, head of hedge fund Greenlight Capital, who has been shorting Lehman's shares. Einhorn has argued that Lehman has miscategorized some of the assets on its balance sheet. Lehman, however, has its prominent defenders, including the Sanford Bernstein analyst Brad Hintz.

Lehman has also taken a hit of between $500 million and $700 million on hedging positions as it tries to offset its heavy exposure to both commercial and residential U.S. real estate, the Financial Times reported Wednesday. Hintz also predicts that Lehman, like other brokers, will disclose serious losses on unsuccessful hedges when it reports second-quarter earnings.