U.S. Stocks Gain on Speculation Lehman Brothers May Be Acquired

By Eric Martin

Aug. 22 (Bloomberg) -- U.S. stocks advanced, limiting the first weekly drop in the Standard & Poor's 500 Index in a month, on speculation an acquisition of Lehman Brothers Holdings Inc. will end the worst slump by financial shares since at least 1962.

Lehman, the brokerage that lost almost 80 percent of its value this year, surged 11 percent after Reuters reported Korea Development Bank said it's open to purchasing the firm. Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. gained more than 3 percent. United Airlines parent UAL Corp. rose 8 percent and General Motors Corp. climbed as crude slipped almost $2 a barrel.

The S&P 500 added 8.74, or 0.7 percent, to 1,286.46 at 9:42 a.m. in New York. The Dow average climbed 104.14, or 0.9 percent, to 11,534.35, and the Nasdaq Composite Index rose 17.89, or 0.8 percent, to 2,398.27. Almost three stocks rallied for each that declined on the New York Stock Exchange.

``Lehman Brothers was the next firm likely to fail,'' said Jeffrey Kleintop, who helps oversee $273 billion as chief market strategist at LPL Financial in Boston. ``The market looks at this as a positive in that there have been expectations Lehman would survive in some form, the question was where was the money going to come from.''

The 54 percent plunge in the S&P 500 Financials Index from its February 2007 record through July 15 of this year was the steepest drop in at least 46 years, according to data compiled by Birinyi Associates Inc., the Westport, Connecticut-based research and money management firm founded by Laszlo Birinyi.

Bear Stearns Collapse

Financial companies in the S&P 500 had dropped 31 percent this year after the market for subprime mortgages collapsed. Bear Stearns Cos., once the second-largest underwriter of mortgage bonds after Lehman, was rescued by JPMorgan Chase & Co. in a March takeover brokered by the Federal Reserve.

Lehman jumped $1.44 to $15.16. Lehman spokesman Mark Lane declined to comment. Lehman is the fourth-largest U.S. securities firm. Korea Development Bank, the state-run lender, is examining options including the purchase of Lehman, Reuters quoted a spokesman as saying. Chief Executive Officer Min Euoo Sung declined to comment when contacted by Bloomberg.

``There's a ton of petro and trade dollars sloshing around the world now looking for a parking spot,'' said Michael Mullaney, a Boston-based portfolio manager at Fiduciary Trust Co., which manages $10 billion. A sale of Lehman to a strategic investor provides ``an orderly way to work their way out of positions, as compared to a fire sale.''

The S&P 500 has lost 0.9 percent this week as concern grew shareholder value would be wiped out at Fannie Mae and Freddie Mac if they are nationalized and commodities headed for their biggest weekly gain in 33 years. The stock index has dropped 18 percent from an October record as credit-related losses at banks worldwide topped $500 billion and record oil curbed growth.

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.