Friends rally to Lehman's defense

The stock ends a five-day slide after BlackRock buys shares and Blackstone reportedly mulls the purchase of a big stake.
By Colin Barr, senior writer

NEW YORK (Fortune) -- Lehman Brothers still has friends in high places.

Shares of Lehman (LEH, Fortune 500) surged 10% Friday after one big investment firm said it bought shares in Lehman's fundraiser earlier this week, and another reportedly mulled over a bid for a sizeable stake in the New York-based brokerage firm.

The rally, which comes a day after CEO Richard Fuld parted ways with his top two lieutenants in his latest effort to regain investor confidence, shows Lehman hasn't been abandoned by its pals on Wall Street. Lehman investors are hoping the developments point to a reprise of the happy ending to the 1998 Long Term Capital Management crisis. In that mess, a badly damaged Lehman was able to pull through with the help of other firms on the Street.

Heading into Friday, investors had their doubts. Lehman shares had declined five straight days amid deepening concern about the brokerage firm's financial health. The selloff took the stock within a dollar of the low Lehman hit back in March, when the collapse of Bear Stearns momentarily threw the well-being of the entire brokerage industry into doubt.

But Friday's stock move shows why few observers are expecting Lehman to go the way of the unbeloved Bear Stearns, no matter how bad its balance-sheet problems turn out to be. First, CNBC reported that another big investment firm - the Blackstone (BX) private equity shop run by Lehman alum Steve Schwarzmann - is considering a possible bid for 20% to 30% of Lehman.

Rumors have been swirling this week about possible buyers for Lehman, though many observers doubt a full-fledged buyout is in the cards, given Fuld's desire to continue running the company and the paucity of banks with deep enough pockets to spend $15 billion or more on a deal. The Wall Street Journal has reported Lehman has been in talks over a possible investment by banks in Korea, while other speculation has focused on private equity players such as Chris Flowers, who sought to buy Bear Stearns when it was at the abyss back in March but failed to line up sufficient financing.

Later Monday, Lehman got another shot in the arm when giant money manager BlackRock (BLK, Fortune 500) told Bloomberg it bought Lehman shares earlier this week. Blackrock said it isn't interested in buying Lehman, but believes Fuld and his revamped management team will see their way through this storm.

"We have confidence in the firm, in the leadership," BlackRock President Robert Kapito said Friday, Bloomberg reported. "They have a history of being a team, a place of focus, of working out their situations, of having confidence in the marketplace. They're trying their best to do that."

The comments from BlackRock, one of the rare financial firms that hasn't been savaged by the mortgage meltdown of the past year and a minority-owned affiliate of Merrill Lynch (MER, Fortune 500), come a day after Fuld demoted operating chief Joseph Gregory and finance chief Erin Callan in his latest bid to restore investor confidence in the firm. Earlier this week, Lehman stunned Wall Street by projecting a much larger-than-expected second-quarter loss of $2.8 billion. Lehman also raised $6 billion in new capital, marking its third trip to the capital markets in four months. Callan said after the first capital raise, a $1.9 billion debt offering completed in February, that Lehman had met its funding needs for the year - a comment that has since been used by skeptics to batter Lehman's credibility.

Lehman's latest slide was precipitated in part by comments made last month by hedge fund manager David Einhorn, who is short Lehman's shares. He questioned the firm's accounting, saying Lehman hasn't been sufficiently aggressive in writing down the value of some bond holdings in a sharply weakening market. Lehman rejected the comments, but it has failed to offer a full accounting of its positions that might allow investors to decide for themselves whether Einhorn's criticism is warranted.

The firm gets its latest chance to soothe fears about its financial health on Monday, when Lehman is due to post its full second-quarter earnings report. Investors already know Lehman lost $2.8 billion for the quarter ended last month, but they'll be looking Monday morning for better detail on the firm's writedowns of declining mortgage holdings, among other things. Monday's conference call may also give Fuld, who didn't appear on Lehman's conference call this past Monday, a chance to address questions about the firm's future and his leadership. Let's just say Lehman shareholders will be "actively listening" to what Fuld has to say.

(My comment: Next monday's conference call could be similiar event like bail out of Bear Stern. Concerns on financial sector are addressed and stock will start rally again. LEH is going back to 30-35 in weeks if LEH can stay above 21.17 for next few weeks.)