Comparing Bear and Lehman

Last Monday morning on Money For Breakfast in our America's Biggest Business Rivals series, (which we air every Monday), we profiled Bear Stearns vs. Lehman Brothers. To say that the decision to pit them against one another was slightly controversial is an understatement! We contacted both Bear Stearns and Lehman Brothers to make sure that we had all of the proper history on the each of the respective companies. Lehman, once they understood what we were doing, was not happy with us! They felt a comparison to Bear Stearns was inaccurate and that the proper comparable was Goldman Sachs.

After contacting several of my colleagues on Wall Street (who covered the broker dealers as Wall Street analysts), studying their history and reviewing their financials, I made the determination that BSC vs. LEH was the right comparison in this group. Was it a perfect comp? No. Lehman's market capitalization at the time was three times that of Bear Stearns, Lehman was not at risk of insolvency and Lehman placed much higher on almost every table measuring mergers and acquisitions, fixed income and equities. But America's Greatest Business Rivals is not just a measure of today. It's a measure of the history of two companies, how they have competed with one another throughout history, their corporate culture and their brand.
They're both run by iconoclasts, started and were primarily known for their fixed-income businesses and were the smaller broker dealers in the business with less global exposure than some of their counterparts.

As we wake up this morning and read the headlines about J.P. Morgan's acquisition of Bear Stearns, rumblings about whether Lehman is next have begun to take center stage. Lehman will report earnings tomorrow. What happened to Bear Stearns in the early part of last week happened to Lehman on Friday. In the credit-default-swaps market on Friday morning, Lehman's paper widened by 65 basis points in the wake of the Bear Stearns news. The implied volatility in Lehman's options shot up 76% to 113.8% with record level put buying in the March contracts at 35, 40 and 45. What does this mean? Investors (whether they be hedge funds, individuals or owners of the stock) are worried about the financial health and well being of Lehman. They are buying downside protection by purchasing puts and betting that the stock will go lower. The implied volatility, which measures sentiment, and activity in those options shot up because the level of put purchases spiked. Remember when we talk about the VIX or the Volatility Index, we talk about the measure of volatility or downside protection in the market. Watch VIX prices today. When the VIX spikes, the market tends to the opposite. It may signal that we are near a bottom!