Who Might Buy Lehman?

Peter Eavis and David Reilly are thinking along the same lines as me: Lehman Brothers should be sold. But then we part company, for the WSJ writers' shortlist of potential acquirers is deficient in the only think which matters right now: undeniable balance-sheet strength.

At the right price, Lehman may make an attractive target for a private-equity firm or hedge-fund group that wants to add brokerage and investment-banking operations. Blackstone Group CEO Stephen Schwarzman is a Lehman alum who has long wanted to add more investment-banking businesses to his firm.
Citadel Group, a money manager with some sales and trading operations, may want to do the same. J.C. Flowers proposed buying Bear Stearns before its collapse, so interest from that buyout group wouldn't be a surprise.

The problem with any private-equity acquisition is that one an investment bank disappears into private equity's black box, no one really knows for sure how strong or weak it is. Sure, the SEC will continue to regulate it, but the SEC is an ineffective bank regulator at the best of times. And one might hope that the Fed would continue to keep an eye on things, but they're not going to be communicating what they know to the market. Which leaves basically the ratings agencies and whatever disclosures the bank still has to make as an issuer of publicly-traded bonds. Neither provide anything like the level of granularity and detail that one gets from a NYSE-listed company.

If there's one thing that market participants hate right now, it's uncertainty. Losses they can deal with, but anything unknown has a habit of blowing up. That's why Lehman CFO Erin Callan's full-transparency strategy was a good one; its only failure is that it didn't go far enough. If Lehman was bought by Blackstone or Citadel or Flowers, no one would really know how well or badly it was doing, and the sensible, cautious play would be to simply move all counterparty risk elsewhere. Which of course would effectively kill Lehman.

A large commercial bank, by contrast, would make a much more reassuring acquirer. There's never a shortage of European banks wanting a greater investment-banking presence in the US, and between the cheap dollar and Lehman's depressed share price, the bank is looking increasingly affordable right now. RBS? Dresdner? BNP? All could make a case. And then there are the emerging giants: what if ICICI was interested, or Itaú? Lehman's market capitalization is just $17 billion at this point, and it might even be amenable to a takeunder if things continue to get worse. At that price, there are lots of potential acquirers with deep enough pockets, many of whom might well place a large trophy value on Lehman.

Finally, of course, there are the US banks. Most of them are in more than enough trouble right now without trying to digest a major acquisition, and the strongest of them all, JP Morgan, is unquestionably out of the running now it's bought Bear Stears. So it's improbable - but far from impossible. Buying Lehman would not be a sensible decision, necessarily. But bank CEOs don't always do the sensible thing, as we've seen many times over the past year.