Lehman leads the way in ‘lottery ticket’ rally

何鸿燊

By Michael Mackenzie, Nicole Bullock and Greg Farrell in New York

Published: September 6 2009 19:00 | Last updated: September 6 2009 20:37

Almost a year after it filed for bankruptcy, the value of Lehman Brothers shares has soared amid a surge in trading activity.

Other bankrupt companies – where the value of shares is usually close to zero because equity investors are compensated only after all creditors have been repaid – have also seen a frenzy of trading in the last few days.

People lost so much money last year and they are so desperate to recoup their losses, that they are willing to invest in anything,” said Brad Golding, portfolio manager of CRC Financials Opportunity hedge fund in the Cayman Islands. “Everyone wants a lottery ticket.”

After Lehman collapsed last September, Barclays Bank and Nomura bought substantial parts of its business. That left a holding company largely containing toxic mortgage assets and derivatives potentially amounting to billions of dollars that are still being unwound.

Lehman shares peaked last week at 32 cents, having spent much of the year at less than 5 cents. When the rally in Lehman began in late August, trading volume soared above 100m shares on one day, compared with virtually no activity earlier in the year. Lehman shares closed last week at 14 cents with trading volumes on Friday reaching just over 11m shares.

Shares in Washington Mutual and IndyMac, two other bankrupt financial institutions, have also risen sharply in recent days.

Traders say Lehman and WaMu have more debt than cash, meaning they have no equity value and that buying their shares is a forlorn cause.

“It is tulip mania,” said Mr Golding. “People have decided [a stock] is worth something based on nothing. The facts are quite the contrary.”

Trading in the delisted stocks of companies that have filed for bankruptcy takes place in private, over-the-counter deals, rather than on a registered exchange. More often that not, a sharp rise in the stock price of a bankrupt company reflects speculation about the recovery value prospects.

The rally in Lehman shares has followed explosive rises in the share price of Fannie Mae and Freddie Mac, the two mortgage companies taken over by the US government last year. Shares in AIG and to a lesser extent Citi, two companies with significant US government ownership, have also risen sharply in recent weeks.