Lehman’s descent into the media vortex

I’ve seen this peculiar downward spiral take shape from the vantage point of a financial journalist and as a spokesman for New York-based Drexel Burnham Lambert during its last days.

It will come as a surprise to no one that Lehman Brothers Holdings Inc. is in dire financial shape — its $3.9 billion loss for the quarter ended Aug. 31, pitiful share price and 93% dividend cut bear grim witness to that fact.
As the New York-based firm’s woes expand, so, too, does the media’s news coverage of those woes.
As dark reality plays off industry and media perception, Lehman may be caught in a classic vortex.
I’ve seen this peculiar downward spiral take shape from the vantage point of a financial journalist and as a spokesman for New York-based Drexel Burnham Lambert during its last days.
Here’s how it works: First, there are sporadic press reports of trouble. Maybe the trigger is a decline in earnings, a falloff in a product in which the company has a strong franchise, or a seemingly unrelated news event.
In Drexel’s case, of course, it was the government’s investigation into Ivan Boesky and insider trading that started the process.
At the first hint of trouble, the affected company either denies that anything has happened or says the event is immaterial.
News coverage abates for a while and then returns in full force as other negative events unfold with regard to the challenges the company faces as well as the opportunities for recovery.
For about a year after investment banker Dennis Levine was charged with insider trading in May 1986 and federal prosecutor Rudolph Giuliani began his investigation, Drexel kept on operating almost as before despite the constant low hum of media coverage.
Then comes the tipping point.
For Drexel, it came when counterparties stopped trading with the firm after it appeared it would be hit with RICO violations.
The Bear Stearns Cos. Inc. of New York, which had also limped along despite worries about its financial health, went into its final, fatal tailspin when the company asked for access to the Fed discount window earlier this year.
The tipping point for Lehman came yesterday when the Seoul, South Korea-based Korea Development Bank walked away from the bargaining table one too many times, causing Lehman shares to tumble by more than 45%.
But as grim as things look for the firm, nothing is inevitable.
In 1991, when Salomon Brothers of New York was pushed into the spotlight over bond trading troubles, shareholder Warren Buffett stepped in as chairman and saved the day.
For Lehman’s sake, let’s hope the firm will live to see another positive news cycle.

Evan Cooper is the deputy editor and online editorial director of InvestmentNews.
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