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Blaming short-sellers for bank stock beatdown

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The New York Times reports that, with David Einhorn target Lehman Bros. (NYSE: LEH) filing for bankruptcy, "some investors are afraid that fund managers like him will take advantage of the climate of fear stirred up by the troubles of Lehman to target other weak financial firms whose declining share price would bring them rich rewards."

Over the weekend, heads of major banks begged regulators to reinstate a rule making short sales in the financials more difficult, but regulators said no.

The New York Times also inexplicably states that "A rapid plunge in the shares to below $4 last week ultimately created the conditions that brought the 158-year old firm to its knees on Sunday."

Here's the problem with that logic: The Federal Reserve and all the major banks spent the weekend trying to find a way to avoid a Lehman bankruptcy filing. Anyone willing to assume all of Lehman's liabilities could have had the company for whatever price he wanted, less than a dollar even. But no one wanted it! Lehman's problems were not liquidity, they were solvency. The company had no equity. Bank of America (NYSE: BAC) could have had Lehman for a can of baked beans and a roll of toilet paper, but instead went and paid something like $35 billion for Merrill Lynch (NYSE: MER). There is no rational way to pin the mess that is Lehman on short-sellers.

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Last updated: November 11, 2009: 01:28 PM

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