It was April, and Mr. Fuld was blaming short sellers, one of the most maligned tribes on Wall Street, for spreading rumors about Lehman Brothers, the troubled investment bank he runs. Shorts bet against stocks, and Lehman, they were whispering, looked like the next Bear Stearns.
Mr. Fuld must have been irate again last week, when Lehman’s stock price plunged 11 percent in the space of three hours for no apparent reason. The shares opened that June 30 morning at $22.25, drifted higher — and then took an abrupt turn around 1:30 p.m. Lehman closed that day at $19.81, its lowest level since 2000.
This time, the rumor du jour wasn’t that Lehman was going to be forced into bankruptcy. No, this time the talk was that Lehman was about to be sold to Barclays, the big British bank. It was eerily reminiscent of Bear Stearns’s fire sale to JPMorgan Chase in March. And when it comes to Lehman, the shorts have bet right lately: the stock has lost almost 70 percent of its value this year.
The rumor turned out to be wrong, as rumors often do. But this one even had an exact price: Lehman would be sold for $15 a share, traders buzzed all afternoon, in what would amount to a “take under” — Wall Street parlance for when a company sells itself for less than its market value.
Maybe a few people were whispering, but many more seemed to be listening. Talk that Barclays was buying even reached Lehman’s trading desks, where the rumor whipped around the office and then reverberated across Wall Street again. Panicky Lehman employees started calling friends outside the firm to find out what was going on inside the firm. One Lehman executive said, “Even my mother-in-law called me.”
Rumor-mongering, of course, has long been the stock in trade of some on Wall Street. Billions of dollars a day are bet on “whisper numbers” and overheard lunchtime chatter. Information is the coin of the realm. Some of it is legal. Some of it is not. Just ask Ivan Boesky.
But amid the desperation of a bear market — and the pervasion of technology that allows traders to communicate virtually untraceably — the art of the rumor has become increasingly powerful, even democratized. Absurd rumors can have legs, like the Lehman-Barclays one, which Richard Bove, an analyst at Ladenburg Thalmann, said “ranks up there with the moon is made out of green cheese in terms of its validity.”
Traders, outfitted with cellphones, regularly bypass their recorded, corporate phone lines — and compliance rules — to tip off friends at other firms, often by text messages. (By the way, let me debunk a popular myth: some phone companies save text messages, so you’re not free and clear.)
Instant-messaging has become another popular form of communication — and one that typically isn’t saved anywhere. Clever BlackBerry users send messages using PINs, bypassing their corporate servers. And then, of course, there’s e-mail, which as prosecutors have discovered remains a perennial favorite way to spread a rumor — catching the rumormongers in the act.
How else to explain the rapidity with which rumors circulate in the market these days? The telephone, long a rumormonger’s best friend, is inefficient next to a Bloomberg terminal.
Of course, the most dangerous rumors are the ones that aren’t true, especially the ones that send stocks south. That’s why shorts are being vilified as soulless profiteers.
An executive at Lehman said to me: “A rumor travels better than the truth. All you can do is deny, deny, deny. But it’s like being asked, ‘When did you stop beating your wife?’ ”
As an aside, David Einhorn, a hedge fund manager, has taken a lot of flak for being an outspoken short on Lehman. But that’s not to say he’s a rumormonger: he’s been open about his views, which have been both right and wrong.
In mid-June, Merrill Lynch may have been a victim of the rumor mill too. Its stock fell 3.6 percent as speculation flew that Merrill Lynch might announce big write-downs before announcing its earnings. Of course, that rumor proved false too. But is it just a coincidence that the rumor spread on a Friday known as a “quadruple witching day” — when lots of Merrill Lynch options were expiring?
Investors, or at least their lawyers, seem to be increasingly worried about the issue. In the last two months, a series of memos from law firms like Sullivan & Cromwell and Schulte Roth & Zabel have been sent out to banks and hedge funds. As Schulte Roth said in its note to clients, which include SAC Capital Management and Jana Partners, two big hedge funds, “spreading false rumors in order to induce others to trade in a company’s securities constitutes market manipulation.”
James Dimon, the chairman of JPMorgan, says rumor-mongering is unconscionable. “I think if someone knowingly starts a rumor or passes on a rumor, they should go to jail,” he said on Charlie Rose’s program on Monday night. “This is even worse than insider trading. This is deliberate and malicious destruction of value and people’s lives.”
Even the Securities and Exchange Commission chairman, Christopher Cox, seems to acknowledge the problem, though he hasn’t done much about it. In his letter to the Basel Committee after Bear Stearns was sold to JPMorgan, he said that “rumors spread about liquidity problems” and that Bear’s undoing “was the result of a lack of confidence, not a lack of capital.”
Confidence is vital to any business, but it is particularly important to financial companies. Bear Stearns, after all, was done in by what amounted to a run on the bank (which Bear, through its own mismanagement, was ill equipped to handle).
A spokesman for the S.E.C. said, “We definitely are vigorously pursuing rumors that are fraudulently manipulating markets.” He said that the commission is often working behind the scenes and has a “hedge fund working group” that is looking directly at the issue. He also pointed to a complaint against a hedge fund manager in April, who he said spread takeover rumors about Alliance Data Systems, as proof that the commission was doing its job.
Bryan Burrough, a co-author of “Barbarians at the Gate,” wrote an article for Vanity Fair this month in which he suggested an even more nefarious plot in which “a group of hedge fund managers actually celebrated Bear’s collapse at a breakfast that following Sunday morning and planned a similar assault on Lehman the next week.” That may be a bit too rich. (His article also blames the news media for fanning the flames at Bear.)
There’s no way to quantify whether rumors are more rampant today than they used to be or whether they are just traveling faster. But what is clear is that there seems to be little being done about it. It might be difficult to make a case, but you’d think you’d see subpoenas flying at least as fast as the rumor mill.